Q. We have been part of the fortunate few who have received mineral income. We had set things up in an Limited Liability Partnership. In the partnership, we still own fifty-one percent interest and we gave the remainder interest to our children – one of who is farming. Over the past year, this LLC has paid out close to nine hundred thousand dollars in income…
…Something we never dreamed could happen to us. We are just glad we got it done so this property is now protected from taxes and nursing home costs for us, as we get older.
The problem is this. In our estate plan before, our son was going to receive a larger share of the farm and ranch assets – as he had worked there and made a career out of farming and ranching.
However, with the mineral income split up the way it is, he certainly is earning a lot more income from the minerals than he ever did on the farming and ranching part of it – although those have been good the last few years too. But you never know what’s going to happen with this mineral income – it could be here and gone tomorrow. How do we build an estate plan knowing that our farming child can now afford to pay much more for the farmland – right now – but might not have the same opportunity in the future? – Back to the Future.
The addition of mineral income certainly has to change the way estate planning is handled.
One thing you mentioned is that by putting the property into an LLC, you protected the property from estate taxes and long-term care costs or Medicaid attachment. That’s not entirely true.
Your percentage of ownership – or the value of your stock shares is still included in your estate for estate tax purposes. If the value of your minerals in an LLC are approximately nine million dollars (based on the income you’re receiving right now), you still own four and a half million dollars of the LLC shares and they will be included in your estate for estate tax purposes. If the remainder of your estate doesn’t go over five and a half million, then you don’t have a problem.
Where estate taxes are concerned, I have a consistent problem with people – clients – coming in to me and telling me their farmland is only worth four to five hundred dollars per acre. However, when I hear of recent sales of farmland in the four thousand dollar range across the state, I know IRS is not going to recognize that low of a value upon your death. You better listen to recent land sales in your area as the factor to use in determining the value of your land – IRS doesn’t care what ‘you’ think it’s worth – they’re concerned with whatever it would sell for on the open market – or Fair Market Value.
Secondly, you said the minerals are protected from Medicaid in an LLC. Untrue again, as you still own the shares of your LLC and they have FMV value. If you enter a nursing home and can’t pay for care, they’ll be more than happy to have you auction off your shares in the LLC to the highest bidder. You’ve only protected the portion you gave to the children and, even that, only after five years.
As you stated, before the introduction of mineral income into your life, it was fairly common to set up estate plans so the farming child received more than the non-farming children – especially when the planning was based on labor inputs and income rather than on the net value of the land.
However, when all of the children suddenly start getting a check from your mineral LLC – including your farming child – it’s a little tough to tell the other children the farming child shouldn’t have to pay something less than FMV for the farmland when he’s getting as big a check as he is.
My advice for everyone in this situation is for the farming child not to go on a spending spree to buy other land or machinery. If he wants to clear up future debts owed, he can use his proceeds to either buy the land from you today – so it’s done when you die – or insure you for enough to buy out the other children at the future FMV. If he goes and spends the money on all sorts of other things, he isn’t going to get much sympathy from the non-farming siblings.
Secondly, if you’re now receiving enough income to afford to buy great long-term care insurance from your mineral income, the best thing you can do with your income is to invest in a great policy. If you want to be able to make decisions someday as to what type of place you’re going to stay in, what type of care you’re going to receive, and what your quality of life is going to be down the road, take some of the mineral income and protect your future. If all you’ve got is a ‘cheap’ policy – from $100/day to $150/day – you’re not going to like what that’s going to buy you in the way of care someday. You’re buying the Hotel 6 policy – not the Holiday Inn policy.
Do you have questions about estate planning? Need to know more about how you can “Keep the Family Farm in the Family”? Email questions to Michael Baron at [email protected] or call 800-373-4078.