Dear Michael:

We had set up our estate the way you had described in your last column. Our land and machinery will go to our farming son and our two daughters will share our savings which is made up of C.D.s, retirement funds and some stocks and bonds.

It’s certainly not equal with what the son will be getting but he has been working all these years here and they have not. We are retiring and letting him take over the livestock and farming.

– Two Big Headaches

Dear Two Big Headaches:

As I was explaining in my last column, when a person dies, the personal representative(s) will be charged with the duty of meeting all of your legal obligations upon your death. Legal obligations are income taxes still owing, estate taxes if any, costs of internment, health costs not covered and legal fees.

These costs, as well as any other debts, are paid out of the cash reserves of the estate – all those assets you mentioned above. This can antagonize your daughters as they’ll feel like they paid all the costs of your estate while your son, who received the farmland, didn’t bear any.

Of course, the first question is “Will the funds you have set aside for your daughters still be there when you both die?” Almost seventy percent of all people will need some type of long-term care before they die whether that be home care, assisted living or institutional care.

Many people tell me they have long-term care insurance. When I ask them for what amount, they usually respond between one hundred and two hundred dollars per day for up to five or ten years. This is certainly a nice amount to have for insurance, but costs of care are now ranging up to three hundred dollars per day for home care (depending on what kind of care is needed) and institutional care. Alzheimer’s and dementia are double those costs for care.

You’re also going to find the longer you live, the more the cost of living is going to be. If you sell your land to your son, that means you will be receiving a fixed payment for a fixed period of time. A comfortable income payment today to you will become uncomfortable five to ten years from now as costs of living rise. You may have to dip into your accounts to meet these costs.

My suggestion to many people is that they insure the funds going to your non-farming heirs to make absolute certain these funds will be received tax-free, estate cost free and immediately. Receiving cash funds from an estate can take anywhere from six months to two years or more depending on what items need to be settled in the estate.

People insure their homes, their livestock, their machinery but fail to insure their inheritance they have left for their non-farm children.

There are two ways to do this. One, you can take all of your liquid assets today and place them into an irrevocable trust so they’ll be protected from long-term care, income taxation, etc. You can put your qualified money into a trust but you’ll need to pay all the taxes on the funds before putting them into the trust. You can receive income from these assets but cannot have access to the principal.

Second, you can set up a trust holding a second-to-die life insurance policy for the amount of your savings. This will cost two to three percent of the sum per year in premiums, but that’s about average for what you pay for auto, farm, machinery and other types of insurance. It will guarantee funds going to you non-farm children within six months of the date of death.

Last, but not least, it will show your other children that you made a concerted effort to provide them an inheritance.

In the psychology of estate planning, if your children understand you did the best you could, you tried to provide for them, you protected their share, you will find that your children will get along so, so much better upon your death.

The farming child won’t have to answer questions about why his inheritance was protected but theirs was not and their non-farm inheritance won’t be ravaged by long-term care costs, taxes, and living too long.