Interested in your thoughts - is this reasonably equitable?

[Bob B.]

I recently learned a bit about my parent's estate plan - through a conversation my mom had with my wife.

About five years ago, my father inherited his family's centennial farm. The farm land is rented out to a local farmer. My mother was having a conversation with my wife. She let it be known that I would inherit the farm land, my only sister would inherit a rental house in town (that house is my sister's current residence), and we would both (my sister and me) inherit the house they (my parents) are living in. I don't know about other assets, and these items would make up the bulk of the estate, and my parents are 66 and 64, so hopefully we have another 30+ years before the estate is transferred. My parents do have a retirement fund, but if they live another 30+ years, I'm not expecting that to be of significant size.

My sister is bipolar, and not responsible with money, and I'm sure that my folks are concerned that my sister would not handle a significant inheritance responsibly.

My question deals with how to treat my sister equitably at the time of my parent's passing. I know I need to talk to my folks more about their thoughts and wishes, but for the purposes of this thread, let's assume that my folks have just been involved in a fatal car crash, and I don't have the opportunity to talk to them about their wishes.

So, I just inherited the farm (hypothetically). Legally I can do anything from sell the farm to the highest bidder, and keep all the cash for myself. Or, I can rent the farm out, and split all proceed 50/50 with my sister. Or, I can do something in between.

I'll give some background on the farm first:

Total size = 200 acres
Tillable size = 170 acres (about 30 acres is wooded, or has buildings on it, and is not farmed)
Current approximate market value = $546,000 (I figured $3,000 per acre for tillable ground, and $1,200 per acre for non-tillable)
Rental rate for tillable ground = $145 per acre.
Expected yearly rental income = $24,650
Property Taxes = $35 per acre - tillable and non-tillable.
Expected yearly taxes = $7,000
Expected annual net income = $17,650

Now is the point when many of you are thinking that a 3.2% RoA is crazy, and why are we discussing renting the ground at all. Let's just say that it's my family's centennial farm, and there's a lot of emotion and pride associated with it, and that discussion is for another time. Back to the scenario.

So, the $17,650 per year - I could keep it all for myself, or I could spit it down the middle with my sister. (I'd likely dole it out in monthly allocations).

Or, I could recognize that I have responsibility to manage the rental, achieve a decent rental rate, work with the tenants, write the check out for the taxes, etc., and that's probably worth something. The going rate to hire a firm to do that type of management work for you is 7% of gross, or in my case about $1,725.

So, what I would lean toward is renting the ground out, taking a 7% management fee off the top for myself, and splitting the net with my sister in equal monthly payments.

Again, I will talk with my folks, and learn more about their wishes. But, any feedback would be appreciated. Thanks.

[TBH]

If you feel a responsibility to take care of your sister when your parents are gone, then yes, I think what you've outlined is a good plan.

If she really doesn't need you to take care of her, then I think it would be okay for you to keep all the income from the farm for yourself. It's your parents' right to dispose of their assets as they see fit, and for whatever reason, they are planning to leave the farm to you and the rental house to her instead of splitting everything fifty fifty. I'm assuming the rental property isn't worth as much as the farm, hence your conflict. But perhaps your parents have been spending more resources helping her out until now, and leaving you a greater piece of the pie when they're gone is their way of evening things out.

[Bob B.]

I'm assuming the rental property isn't worth as much as the farm, hence your conflict.

The house is currently worth $80-90K

But perhaps your parents have been spending more resources helping her out until now, and leaving you a greater piece of the pie when they're gone is their way of evening things out.

Could be. Yes, if someone added up all the help my parents have given me since turning 18 vs. all the help they have given sis since turning 18, I suspect the ledger would be tipped in her favor. Unless you count babysitting. She has no children.

My suspicion, though, is that the protection of the farm is a bigger driver. If her name is not on the title, she can't sell her half of it, or mortgage it. Not that she necessarily would if she could, but she can't if it's not.

I'm putting too much thought into this right now, for something this far down the road. A lot can happen between now and then, but I'd like to have a working plan in my head for when it does.

Another thought I've head since originally posting is that I could help her out with a different project each year, like a roof one year, and maybe new carpeting the next, and so on. But, yes I can definitely see myself falling into the same trap that my parents are in - how to help her out without her resenting me.

[Joan.of.the.Arch]

I agree that it would be good to talk to your parents about it, but if they are reluctant to discuss it, I would not press them.

Since you have children, your parents probably figure you have a larger financial responsibility to meet and you have heirs to whom the farm can be passed upon your own demise. Your Mom and Dad may be seeing that giving the farm to you not only helps provide for two more generations of family, but perhaps a yet to be born third generation.

Also, the way you are living (of which readers of your blog will know) demonstrates a preference for rural living and rural productivity. Does your sister show any such proclivity, or is she more a townie type, for whom a rental house in town makes much more sense and perhaps is handleable?

[Bob B.]

Also, the way you are living (of which readers of your blog will know) demonstrates a preference for rural living and rural productivity. Does your sister show any such proclivity, or is she more a townie type, for whom a rental house in town makes much more sense and perhaps is handleable?

About 14 years ago (it was a couple years before my oldest was born, anyway), my grandparents moved from the farm house to the house in town. My sister then moved into the farm house. She must have lived there 7 or 8 years. And, she was not up to keeping it up, either financially or psychologically.

After my grandmother passed five years ago, sis moved into the house in town, and DW and I renovated and moved into the farm house.

[TBH]

Here's another way to look at this thing.

When your parents pass on, you and your sister AND the farm are all named as beneficiaries in their will. Your sister gets the rental house. You and your sister split your parents house. And the farm gets YOU.

[MonkeyMama]

Three thoughts without thinking overly thoroughly:

1 - Gift tax ramifications. I don't think there will be any substantial ramifications (even if you sell farm and give her 50% of proceeds), in this case. But, just something that needs to be considered and is often overlooked in these type plans.

In this case, annual revenues are well within tax-free gift limit, and Gift/Estate concerns are minimal until we are talking $5 million+ estate on your part (gifter's part). For the most part, may be a gift tax return if you ever give her a larger sum, which is more of a formality at your current asset/estate level.

2 - If you do give her 50% and it works out, you would want to make sure to have some estate planning for that to continue if something happens to you. That said, I'd be wary to make that part of your estate plan until the situation is tried out. I am thinking more long-term if it works out and if she really relies on that income.

3 - A farm is probably a lot of expense and responsibility. I hope she would be understanding if you had years of -0- profits. How would you handle negative profits? From an accounting standpoint, in similar situations we often estimate income paid out and settle up every so often. Something to think about if there is the potential for large expenses or wide variety of income. Maybe pay her $5k or $10k per year and then settle up periodically if things are going well. Meaning, keep a full accounting and pay her the difference at times. But, the whole point of this method is to prevent over-payments to the other party.

Overall, I think your plan is fairly sound.

[bigdaddybus]

I think what you proposed in the first post is generous (towards your sister) and well within your rights to do.


food for thought:
I recently had "the discussion" with my parents (ages 66/65)about my responsibilities as the executor of their estate. (I am 39) It was initated by me, because I want to ensure their wishes are met, and honestly I was curious how much stuff I was going to be asked to do as my parents have alot of assets.
They shared the following with me. (it was very eye opening to me and I am glad we had the talk)
1. Their are 11 people and 2 churches listed in thier trust.
2. 10% of thier liquid assets go to those 2 churches
3. 90% of thier liquid assets are split evenly between the 11 people. (their 2 children, son-in-law, daughter-in-law, and 7 grand children.
4. The grandchildren must be over 30 before recieving their portions.
5. All non cash liquid assets are to be sold so the cash can be split evenly. I have access to the brokerage accounts,safe, and safety deposit box, to do this as the executor.
6. All other assets (approx 50% of estate) are to be split evenly between my sister and I however we see fit. (They said "We dont care what you do with it, we'll be dead")There is going to be alot to sell including a home, 100 acres of hunting land, art, guns, furnishings, etc.

What ment the most to me about the conversation, and surprised me somewhat, is that my parents are treating all their grandchildren equal (as some are biological and some are adopted) and that means more to me than what they are leaving to me.

[Petunia 100]

The house is currently worth $80-90K



Could be. Yes, if someone added up all the help my parents have given me since turning 18 vs. all the help they have given sis since turning 18, I suspect the ledger would be tipped in her favor. Unless you count babysitting. She has no children.

My suspicion, though, is that the protection of the farm is a bigger driver. If her name is not on the title, she can't sell her half of it, or mortgage it. Not that she necessarily would if she could, but she can't if it's not.

I'm putting too much thought into this right now, for something this far down the road. A lot can happen between now and then, but I'd like to have a working plan in my head for when it does.

Another thought I've head since originally posting is that I could help her out with a different project each year, like a roof one year, and maybe new carpeting the next, and so on. But, yes I can definitely see myself falling into the same trap that my parents are in - how to help her out without her resenting me.

You have 4 children, and your sister has none. Perhaps they are also thinking that since they want the farm to stay in the family, it makes more sense to leave the farm to you.