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As we all look to the slowly dying crops and patiently wait for them to hit the optimum harvest condition, it is a good time to remember we are all slowly dying. Everyday, every hour. Yet we will never know when we reach optimum harvest time and depart. Like harvest prep, we can however, get our affairs in order to make transition as orderly as possible. Time to be blunt.

First, everyone, regardless of property status, wealth or relationship with children, needs a health care power of attorney and a general power of attorney. These documents are essential if you are incapacitated and need to have something done for you medically or financially. Everyone needs to pick a pinch hitter and a back up to the pinch hitter. Failure to do so will result in expensive court proceedings to name a pinch hitter. Do not leave it to guess. Name your spouse, name your child, name your neighbor (with their permission) but leave somebody in line to take care of your bills while you cannot.

A will is often the last directive a person gives. If you own real estate or have over $50,000 in assets you are going to need to have a directive on what goes where. If you do not, you will have the state of Iowa take guess for you. This can result in your second cousin that you never did like at the family reunions going out to eat on what is left of your retirement nest egg. Do not let the state give your stuff to your terrible 2nd cousin. Make a will, pick winners and losers and decide who gets the farm.

Don’t punt on tough decisions. Decide if your kids can own the farm together or decide who should get the farm and give the other children other assets. Do not expect the children to magically set aside their own personal goals and desires and do whatever it is that you hope they will. If you have a goal, invest in will/estate plan that makes those goals possible. If you have an adult child that is a perpetual criminal, spender, or has a physical /mental issue that impacts their ability to make a living, blindly giving them assets is not really planning at all.

12 percent of a plan is better than no plan at all. If you are not sure, get a base line plan and then modify it as you determine if your daughter’s desires to farm match her ability. Make the plan well before illness sets in. When you have trouble hiding your memory loss, its is too late to make a plan.

If you are single or divorced and thinking about getting married, whether you are 18 or 80, nothing says I love you like a prenuptial agreement. This document can be wielded like a club against those who whisper your partner married for money or land and make parting ways when thing don’t work out so much easier. Further, a prenuptial agreement can quash the concerns of adult children from the first marriage and hopefully stopping them giving the new partner the side eye at every family get together.

Tell your children your plan. So many times, people litigate because “Pop would be rolling in his grave and would never want Mom to reward the on-farm child with more assets than me.” If Pop spent an hour explaining to his son who moved away to South America when he was 29 why his sister gets more than 50 percent, it might save two lawyers, a judge and some witnesses from cluttering up a court room to figure out if Mom had he and Pop’s plan overridden by the sister.

Right of Refusals may no longer be Alright.

Once again, the Iowa Court of Appeals has ruled that a right of first refusal is not valid if it is not dealt with in some manner. While the court of Appeals isn’t binding on the entire state, it is persuasive authority and helps shape the legal landscape. This will come as a surprise to those who negotiated a right to purchase back a farm sold in the 1980s farm crisis or those who have entered into agreements for purchase rights as part of an estate plan or those who have an estate plan with a right contained in it.

It is wise to blow the dust off those documents and make sure what you think you have is what you really have for rights to purchase. Essentially, the court is saying that Iowa Code prevents the use of any right of refusal that is more than 10 years old unless a timely written statement of extension is in the county court house records. That is simply not possible in many cases where the parent died a long time ago and left the property to non-farming children, subject to the farm child’s right to purchase if the non-farming kids ever wanted to sell. It throws a number of things into uncertainty and may be a “gotcha” moment for the patient, displaced, former property owner who is waiting to see if once again they can reclaim what they have lost.

Right to Farm Laws don’t really mean you have a RIGHT to farm even if you are doing it right.

States have tried to address the conflict between urban development and ag uses for many decades. The fix was to enact “right to farm” statutes protecting a farm’s right to operate with the attendant naturally occurring sights, smells, and sounds. At this point, every state has some version of a right to farm law.

Right-to-Farm laws attempt to prevent nuisance lawsuits against farms that follow all laws and practices best for ag and who beat the complaining neighbor by being first to the party (I.e. the farm was there first Iowa’s statute specifically states that the purpose of the law is to prevent farmers who properly operate their farms from defending themselves from nuisance lawsuits. Iowa has a very tough standard on actually getting to invoke the right to farm defense compared to other states. Despite being an Ag state, the law, as interpreted by the Supreme Court, is not a robust shield for farmers, but rather narrow set of events that if followed may provide some protection. Some legal scholars have remarked that perhaps Iowa has one of the most non farmer friendly interoperation of right to farm laws.

Critics claim these laws hurt non-farm operator property owners by denying non-farm operators the right to use and enjoy their land.  This issue is not going away. Every state has had their right to farm laws tested in various manners. It is not an open and shut case by any means. This uncertainty isn’t good for ag as operations get larger and less people have a connection to ag, the amount of risk goes up and as risk goes up, the cost of managing that risk goes up as well.

Yes, tax season is snow storms, turkey dinner and college bowl games away, but having an eye on the tax prize in July can yield benefits in the winter months ahead.

Some facts to consider, while the audit rate at 0.59%, certain actions can increase that chance of getting the governments all seeing eye pointed at your return.

  1. Higher than average deductions are a warning sign. Considering that people are now considering clustering charitable giving in order to beat the standard deduction, it almost feels like donations amped up to get past the standard deduction will equal increased scrutiny. Further, donating more that $500 of non-cash items means having to fill out an extra form, which is more work for the tax payer and makes the tax return more expensive to prepare in most cases. Some donations will require appraisals (which is not new). This year the amount of charitable giving claimed on tax returns fell substantially as the standard deduction was doubled.
  2. Small businesses with over $100,000 in gross income with large write offs for meals, transportation, travel and 100% use of a vehicle for business purposes are likely targets for audits to support the claims.

Businesses that show losses for a number of years, especially for farm, hobby like businesses and real estate ventures are perpetual targets of increased review. Farm operations should do everything possible to show a tax return once every five years with a positive net income or be prepared to show how the farm operation is truly its own enterprise and not just a tax shelter for off farm income. Those with letters behind their names at work should take note, whether those letters are J.D, M.D, CFP C.P.A, or D.O.

Dillon Law PC

Despite the alarming number reported in the media, Chapter 12 bankruptcy is not on the increase, yet. The reported 75% increase in Chapter 12 Bankruptcy filings was 2 more filings than this time last year. While farm bankruptcy numbers aren’t up, those operating in the shadow of bankruptcy continue grow. The shadows are where things aren’t to litigation yet, but it is clear absent joint action, litigation is likely.

When it is clear that an operation cannot make scheduled payments? It is time to talk to the lender, not on the due date when it is clear that the payment can’t be made. The topics that need to be addressed and considered are

  1. What is the financial condition now and what are its prospects going forward?
  2. What is the physical inventory and value of the assets of the operation with realistic numbers at a liquidation value (understanding that a creditor may apply a 50% or greater discount from what Fair Market Value might be on TractorHouse or BigIron to account for the costs of liquidation)?
  3. What is the tax implication of accelerating sales or the sale of capital assets like equipment and land?
  4. What is broke in the operation or the conditions that lead us here?
  5. What can be fixed in the operation?

Those are the broad-based principles that need to be considered. In the application of these questions, the operation should consider the cash flow for each enterprise (grain, livestock. custom work) and identify what operation is stealing revenue and which ones are generating revenue. Interfamily operations should also be examined. Is the operation subsidizing a brother, a child, a parent’s operation intentionally or unintentionally? Consideration to the impact of missing your payment on their ability to continue is critical.

What is a reasonable ask to the creditor? While it is fact intensive and based on the prior performance of the relationship, creditors can make some concessions where it is appropriate. Things like, removal of delinquency fees and interest, re-amortization of debt over a longer period to reduce payments, foregoing collection activity for a set time period or agreeing to allow another creditor to step in “in front of” the creditor to provide operating capital to generate funds to pay the original creditor are all possibilities.

From the creditor’s prospective, they are concerned about ensuring they have their “ducks” in a row regarding financing documents and once they are secured in that regard, they generally seek the best opportunity to achieve the most recovery in the shortest time possible with the least amount of effort and capital spent to recover the asset. Almost always, the creditor will require a release indicating that the borrower isn’t going to receive concessions from the creditor and then turn around and sue them for violations banking law. This is not an indication that the creditor did something wrong, it’s just a wise business practice. Remembering that it is business and not personal is essential to a successful discussion with the creditor.

Thursday, October 01, 2020
  • Patrick B. Dillon
  • Jill Dillon
Dillon Law PC
Patrick B. Dillon enjoys finding solutions to legal issues and catching problems for clients. Pat practices in the Sumner office regularly represents clients in district, associate district and magistrate courts for agricultural, real estate, criminal and collection issues. He drafts wills and trusts, creates estate plans and helps clients through the probate process.
Dillon Law PC
Jill Dillon focuses on family law, estate planning and IRS matters. Jill is a University of Northern Iowa undergraduate (Political Science Cum Laude) and a Drake University Law School graduate. Jill spent extensive time advocating for low income tax payers in front of the IRS and the State of Iowa Department of Revenue while at Drake.

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