Dear Michael: We've seen the land in our area soar in value, but still the productivity of the land hasn't kept up with the increase in costs of land. How is our son ever going to pay for this land if we give portions of it to our other children? How do we know what he's going to have to pay? How does he plan for this in the future? Do you think land is ever going to go down in value? What type of planning should we be doing now to make certain we keep up with this problem in our estate? – Soaring Out Of Sight
Dear Soaring: In my last column, I discussed why land values are what they are and why they continue to increase. The first and foremost reason is there is more profit per acre to be had than ever before.
In any investment, as long as there is profit built in to it, the price for the investment will continue to climb until the profit is no longer there. Then and only then will the investment stabilize in value. This is true of any investment – stocks, bonds, land, gold, etc.
As soon as the costs for buying something outweigh the return on investment, land will continue to grow in value. It would take a long-term trend of losses in farming (five to ten years) before land will slow down in it's inflation. Even at it's very worst during the nineteen twenties and eighties, it lost half of it's value but returned to it's former value within ten years.
As such, I wouldn't depend on something so catastrophic happening that land values will stabilize or decrease in value in coming years. Even if it does happen, land values tend to start trending up in value again within a short period of time.
There are things you should be doing to lower the stress on the problem. We've come up with many unique solutions whereby we start moving some of the ownership of this land over to Jr.'s name today. Maybe you have to lose a little rent on all of your land so he can afford to buy some of your land rather than rent it? Maybe you can afford to gift to him the $26,000 exemption per year in land payments?
These are all good ideas – not only when balancing the estate with non-farming heirs – but also towards keeping your farm estate values below the ten million dollar estate tax credit now allowed. Why is it so important to keep building your estate value when you know you're going to die someday, and you're going to allow the IRS to tax everything over $10,240,000 at thirty-five percent? Aren't you better off now selling the land to your farming child and paying fifteen percent capital gains than thirty-five percent estate taxes?
We'll see what the next few weeks will hold regarding these $10,240,000 credits and 35% estate tax credits with a December 31st sunset fast approaching. There's some interesting columns coming up soon!
You do have two caveats on helping your farming child grow their estate, though.
One, is it fair to the other children based on the amount of work your farming child has done to improve the value of this farm operation? Many people would say 'yes' and other people might say 'categorically, yes' and others might say 'no'.
Two, if you do move property over to your child's name, make certain you're not moving it from the frying pan to the fire.
If your child might have financial problems, marriage problems, health issues, tax issues, management issues, and you're uncertain if he or she can handle these gifts of land with your utmost trust, then be aware and beware. Many a person has lived long enough to see their children lose a portion or all of their farm – which is one good thing about dying before your kids get it.
Last but not least, measure all of the lifetime costs of acquiring property. If I set up an agreement today with my child that he will pay the other heirs a certain amount of money as well as pay rent to me for the rest of my life, then I have given my farming child something to shoot at as a goal someday.
If I am ambivalent or fuzzy about what my farming child may have to pay to siblings or heirs, I'm lining that farming child up in the shooting gallery and now we're just waiting for the rest of the family to arrive.
All planning must be tight, it must be succinct, and it must be understandable so all children and/or heirs have no doubts about how this estate will be divided someday and how your farming child will be able to continue the business.
Many people say their farming child can 'rent' the property from siblings – but they don't tell the siblings how much they can charge. Many wills state that Jr. can buy the farm, but there's no definition of how it will be valued, or when, or how it is to be paid for.
If you don't have all of these items covered in your estate plan, you don't have an estate plan.