Business decisions made 15 years ago aren’t working out

The Problem (submitted by email from T.J.):

About 15 years ago, we went to an estate planning meeting with a life insurance company. We were concerned about estate taxes, so we thought we had to do something. We started an irrevocable trust with life insurance, thinking the proceeds would be used to pay estate taxes. Now we realize that the trust lists all the children as beneficiaries, and they could just take the money and run. So how will taxes be paid? In addition, after that, we put all our land into an LLC and we have a C corporation for our farm operation. We then gifted some ownership to all of our children to reduce our estate value. It is a mess, and now we’re trying to get some of that ownership back and direct it where we desire. Can we fix this?  

• READ MORE: Estate planning columns from Myron Friesen

Solutions:

Right about now, it would be easy to throw some dirt, which I will do. Life insurance companies know farmers are passionate about their land and the farm would be devastated by a big tax or expensive buyout. For some insurance companies, the product sale can be far more important than the actual plan. Some offer a “farm succession program,” but that is sometimes nothing more than a sales pitch. The easy sale is “scare and sign here.” The majority of irrevocable trusts distribute cash from the trust directly to the children with no provision for farm continuation or paying taxes. It sounds like your situation falls right into that category.  

• READ MORE: How to determine if you need life insurance

What is the fix? Most changes will take some signatures and cooperation from everyone involved, and that could be a problem. You could amend or collapse the trust. Determining what to do starts with your goal for your entire distribution plan. Who needs the cash and how can it be structured to accomplish your intent? While making changes, don’t assume the insurance product itself is good. Some insurance companies sell you what they have, not always what you need. Also, the type of life insurance or any cash value will make a difference in what you can do. Gifting issues need to be understood. The insurance issue may be fixable, but you’ll need better advice than what you’ve had.  

Gifting to all heirs the corporation shares that run the farm was not good advice. Having nonfarming heirs as part of an operating corporation seldom ends well. It’s likely they’ll end up with a minority interest in an asset with limited returns, which is kind of an asset with handcuffs. These shares need to go to your farming heir sooner rather than later: Buy them back for a logical discount. This may cost a little now, but it’s better than facing a bigger problem later. 

The land LLC concept is OK, but the LLC must have rental and buyout provisions for the farming heir. If those provisions are included, an immediate change might not be needed or it may be something you want to address in the future. 

The surge in commodity, machinery, and land values, along with potential tax law changes, will have some of the insurance and gimmick planners amped up and ready to “help” more farmers make all kinds of new mistakes in a panic. Most of your problems can be fixed or improved, but they will take a few conversations and agreements. You are not alone with this type of problem. This discussion may help others avoid the same mistakes.

Myron Friesen is co-owner of Farm Financial Strategies in Osage, Iowa. During the past 21 years, he has worked exclusively with farm families across the Midwest to develop farm transition strategies. Friesen grew up on a Mountain Lake, Minnesota, farm. He owns and operates a 1,070-acre crop and livestock farm with his wife and four children. farmestate.com