Polly Dobbs knows the importance of good estate and succession planning all too well.
"As an attorney specializing in farm estate planning, I spend a lot of time doing tax planning," she said. "But family conflicts have destroyed a lot more farming operations than taxes ever will. A good succession plan can prevent much of that."
Dobbs, who has her own law practice in Peru, and who also does legal work for Farm Journal's Legacy Project, was a speaker at last week's Adult Farmer Class in Wabash. She shared how, after ten years as an attorney in a large Indianapolis law firm, she and her husband decided to return to the family farm where she grew up—once owned by distant relative and famed composer Cole Porter—near Peru, Indiana.
But before she agreed to move back home and take over the farm, she insisted on using her legal expertise to prevent some of those same mine fields from occurring in her own family, which includes her aging parents and four older siblings. Developing the plan included having some frank family conversations, getting an understanding of the key issues, and putting everything down in black and white in a comprehensive succession and estate plan.
Dobbs said that one of the more frequent problems she encounters is farm families putting off making a plan.
"I hear things like, 'Estate planning is for older, rich people,' or 'I'll get around to it in about 20 years after I know if my grandson wants to farm,'" she said. "But I remind them that with the huge runup in land values in recent years, many farm families today are 'rich,' whether they think of themselves that way or not. And if you 'get hit by a bus' tomorrow, bad things can happen to your farm and/or your family if you haven't prepared."
Other common mistakes that Dobbs frequently encounters include what she called the "Do Nothing Plan," and the "Say Nothing Plan." She emphasized that while making a plan and discussing it with family can be difficult and stressful, doing nothing won't make the problem go away. Instead, it will likely create much greater problems and conflicts for the surviving spouse and children. And saying nothing is a bad idea which may breed a sense of entitlement among heirs, and give rise to anger and fighting when one or more heirs get "surprised."
She said another common mistake is to "Just do what my neighbor did."
"Every farm operation is different, they are complex entities, and each family has different goals and circumstances," she said. "Cookie cutter approaches don't work well."
Dobbs said that being properly prepared means having a comprehensive plan and portfolio of appropriate documents, including what she referred to as "not-dead-yet documents"—general durable power of attorney, appointment of health care representative, health care power of attorney, living will, and life-prolonging procedure declaration.
"In Indiana, if you're lingering, but not dead yet, without these documents, nobody has the authority to sign anything," she said. "Then you have to go to court to get a legal guardian appointed, which is expensive, time-consuming, and can be a source of conflict."
After you have the not-yet-dead documents in place, Dobbs said that for many families, a simple "vanilla" will is insufficient.
"If all of the kids are tenants in common, they're stuck together, and all it takes is one disgruntled heir who just wants one big check ASAP, they can force a partition action and court-ordered auction," she said. "At best, you've just made all of your heirs business partners."
Dobbs explained that while there are numerous vehicles that can be used—LLC, C-corporation, S-corporation, limited liability entities, or any of a variety of trusts—most are capable of getting the job done. The key is to find the one that fits your situation best.
Regardless of which legal entity is used, she stressed that many of the basic principles for setting up a successful plan are the same. Some of these include:
• Poll your heirs about what they're thinking regarding the farm or other assets. While putting together your estate plan is your decision and you're the one signing the documents, knowing what they're thinking can be helpful. However taking a poll doesn't imply taking a vote.
• Before you make up your plan, identify those particular family issues that are likely to be problems in your particular situation. Many farm families today are "blended families" which can make planning more complex. Or some grown children may have dependency problems, trouble handling money, or bad marriages. It may be wiser not to give them all their inheritance in one large sum.
• "Fair does not necessarily mean "equal." Equal tenants in common may set the stage for a family feud. Also, develop a plan for what happens with the residence, which can be an emotional issue.
• The more you're clear about your intentions during your lifetime, the less likely your heirs are to feel "entitled."
• If multiple heirs will inherit the farm, establish who should have control and management roles. If not, kids tend to fight over things like cash rent rates, etc.
• If an heir or heirs will inherit farm, but no one is currently involved in the operation, develop a "succession of knowledge" so future management person(s) will know key contacts and information.
• Use a team approach to develop your plan, rather than relying solely on your attorney. Other team members should include your CPA, financial advisor, and insurance advisor. Each team member has expertise that the others don't.
• A "first right to purchase" can be a useful strategy for establishing a priority of who has "first dibs" on buying the farm. However in order to be valid, the person who would obtain that right must purchase it (say for $100) and it must be recorded. Terms can also be established as part of this procedure.
• In the case of an LLC, don't rush into gifting. In today's tax landscape, tax implications of that option need to be carefully analyzed by your CPA.
• Many farmers' assets are largely tied up in land, buildings, and equipment. Life insurance can be a valuable tool in establishing liquidity to leave cash to non-farming heirs.
• The American Tax Payer Relief Act of 2012 ½/2013) was a game changer. Everyone whose estate plan was created before then needs to re-examine it.
• And finally, Dobbs said that even if you have a good estate plan, you need to "dust it off every five years." "Although a good plan is flexible, you need to review it if either the laws or your circumstances change," she said.
Summarizing with her own family's experience, Dobbs called it "a blessing" that her parents had put the succession plan in motion during their lifetime, "while they still had their marbles and were still breathing."
"My dad sat us all down and did some finger-wagging, and said 'This is how it's going to be, and if you don't like it, that's tough,'" she said. "A lot of families avoid that conversation because it's uncomfortable. But you're doing your heirs a disservice if you don't just rip off the band aid, throw it all on the table and say 'This is how it's going to be.'"