At 37, Todd has been farming with his parents for 13 years. He says it has been good. He has been paid a livable wage and he and his wife, Robin, live in a nice, remodeled home where his parents lived before he came back to farm.

Todd and his parents, Jim and Nancy, seemed to enjoy a more harmonious relationship than many parents and farming children until about a year ago. Then Todd realized he had a major concern about his future. Todd has three siblings, two sisters and a brother. If his parents had died a year ago, he would have inherited about $300,000 - the same as each of his siblings.

While that may sound good on the surface, a $300,000 slice of a $1.7 million business was too small to keep his farming career going.

The two couples operate a 300-sow, farrow-to-finish enterprise. The total farm operating assets were worth about $582,000. There is also $1,080,000 worth of land Todd felt he would need to keep the farm business operating efficiently.

Todd discovered that if both parents died, he would have to go deeper in debt to keep the farm going than most lenders allow. He would have to borrow $282,000 and use all his inheritance just to own the operating assets. At best, he would have to rent the land and hog facilities from his siblings. At worst, he would have to buy the assets, or see them bought by neighbors

Todd's story is based on an actual case. The couples prefer to remain anonymous.

Problem Areas There were a number of eye-opening problems in Todd's parents'original estate plan.

First, death costs for his parents' taxes and estate settlement were estimated at about $515,000 with the plan. Those could have been reduced some by using the Special Use Value provision for valuing land and the new Family Owned Business Exclusion (FOBE).

But those come at a potential cost. Jim, Nancy and Todd agreed they would much prefer an estate tax plan that would eliminate taxes without having to use those.

Then there was still debt. Land debt is about $237,000 and the operating debt at the time they did estate planning was about $50,000 for total debt of about $287,000.

Another problem with the old estate plan was the uncertainty Todd faced compared to his siblings if Jim and Nancy died. After their parents' deaths, the three, non-farm children would go to work the next week and earn the same pay as before. Their financial lives wouldn't change - except that they would soon have $300,000 more cash or assets from their inheritances.

In contrast, Todd would face real uncertainty about his career and income. While his net worth might also increase by $300,000, a good part of his working assets (land) might be suddenly pulled out from under him. He would have to find borrowed capital just to keep the working assets. He might not even have a house to live in.

While Todd was farming, he wasn't building net worth of his own. His dad, Jim, assured him that he would be able to continue farming. Todd had faith that his parents would treat him right, but the plan didn't get worked up and written down until last year.

All growth and inflation were accumulating in Jim and Nancy's estates. With a net worth a year ago of about $1.7 million, they will soon grow beyond the approximately $2 million that can pass free of federal estate tax (by 2006) with a good estate plan. (For deaths in 1998, a husband and wife, with good planning, can pass only $1.25 million free of federal estate tax. That doesn't reflect using Special Use Valuation or FOBE.)

Jim is still "land-and-hog hungry," as he puts it. If the 160 acres next door, or the prime 80 acres down the road, comes up for sale, he wants to be in on the bidding. If there's an opportunity for profit by adding another hog facility to his hog business, he'll do that, too.

Inheritance is another thing in the picture for Jim. His mother is still alive and he is in line to inherit about $400,000 at her death. That could easily add $150,000 to $200,000 of tax cost in unplanned estates and quite a bit in even well planned estates their size.

Todd is the only one of Nancy and Jim's children who live in Illinois where their farming operation is located. While this may not be classified as a problem, it does mean Todd and Robin will likely be the ones who will watch out for and help Jim and Nancy in their later years.

Should there be some compensation for that? They wonder.

Jim and Nancy told their estate planner they feel Todd and Robin get along great. But they still have the concern about divorce involving their children and what it could do to their business, especially if Todd ends up with a lot of the ownership.

Solutions Jim isn't ready to quit farming. But at 58, he wants to slow down a little over the next 4-7 years. He wants to stay a little active in the farm business until he's at least 70.

He was very receptive to ideas presented by his estate planner - especially when presented with the list of potential problems just described. Here are some of the things Jim, Nancy and Todd have done, plan to do and/or are considering.

Trust Cuts Taxes First, they met with an estate tax planner who designed a plan that will cut death costs for taxes and estate settlement to an estimated $20,000, resulting in $495,000 savings to the estate.

They accomplished this huge savings through a trust. The trust will take effect when the first spouse dies and will end when the second spouse dies. Gifts will help them keep the size of their estate below $2 million net worth.

If they both live until 2006 or longer, their heirs should not need to consider Special Use Valuation or FOBE. But if one or both of them die before then, their heirs will use those options just enough to eliminate all federal estate tax.

Farming Son's Contribution Jim's estate succession planners asked how much of their (Jim and Nancy's) net worth had resulted from Todd farming with them for 13 years. Jim had never thought of it that way. Trained in animal science and business at college, Todd was more than just labor right from the start. But, Jim admitted, Todd was paid more like labor than management, with non-cash promises as a bonus. So part of their net worth should already be Todd's.

Some business owners have specified in wills that the farming child would receive 1-2% of all farm assets for each year he/she has farmed with the parents at the time of their deaths. The assets include hogs, machinery, grain and feed inventory, land, and corporation stock if they have incorporated the family business. There is usually a top limit of 25-50%.

All other assets are divided equally between all the children or just between the non-farm children.

In Jim and Nancy's estate, land makes up $1,080,000 of the total assets. Livestock, machinery and feed and grain inventory make up another $582,000. There's still about $237,000 of debt against the land and $50,000 against the farm operating assets.

So if Jim and Nancy died now, Todd's percentage would be 26% (2% x 13 years) if they specified in their will that Todd receives 2% of the farm assets per year he has farmed with a maximum of 30%. The rest of the assets would be split equally among all the children, each receiving 25% of that amount, including Todd.

Splitting out just the land, Todd would inherit $280,800 worth of land from his 26% share. Plus, he would get another $199,800 worth of the land from his 25% share of the rest. That totals $480,600 of the land or 44.5% of the assets. Todd would also assume part of the land debt. He would assume 44.5% of the $237,000 debt against the land, amounting to $105,465.

The other three children would share the remaining $599,400 of land value, or $199,800 each. Also, they would each assume $43,845 of debt on the land. The other farm assets would be treated the same. Todd would receive 44.5% of those assets, too. The remaining 55.5% would be evenly split among the four siblings.

Planning For Untimely Death A danger with this formula is that the share for the farming child builds up slow. You might have a son, for example, who has only been involved for two years when the parents are killed in an accident. His farming career might die with them because he hasn't built up much ownership.

In this case, you can consider two options. First, you might start the percentage at 15-20% and have it grow at 0.5-1% per year to the maximum.

The second option is purchasing a life insurance policy on yourself naming the farming child as the beneficiary. The life insurance policy would protect the child against an earlier-than-expected death. Term insurance also might fit that need.

Another splitting formula some people use is to divide the estate five ways if there are four children. The farming child gets two shares and each of the others gets one share. In that case, the farming child would receive 40% and the others receive 20% each.

If your sole purpose is to protect the farming child's farming career right from the start, consider the shares or percentage plan. But if you want to divide assets based more on contribution, the percentage per year plan grows with time.

Life Insurance's Role Jim and Nancy are not strong on life insurance. Jim carried term insurance in the earlier years of their marriage when they had a lot of debt and the children were young.

Now that their net worth is more than enough to provide for their income needs during the rest of their lives, Jim has only a $10,000 policy.

Todd, however, decided to reconsider life insurance. He took out a $250,000 last survivor policy on his parents and a $150,000 policy on Jim. If Jim dies first, Todd wants to be able to buy some assets from the estate. Owning more of the assets would help replace some of Jim's input of labor and management.

After both his parents die, the total of $400,000 of life insurance will allow Todd to own about 70-75% of the assets his parents now own. Borrowing the rest of the money needed to purchase the entire estate doesn't worry him.

Reduce An Estate To keep their estate from growing even larger, Jim and Nancy were urged by their planning team to make gifts. But, like most people nearing retirement, they are concerned about not having enough income when they no longer work. There is almost always the question to the estate planner: "What if I end up in a nursing home?"

Even many, very wealthy people are afraid they might lose the farm and have to be on Title 19. Often, that fear originated from an insurance agent trying to sell long-term care insurance.

Jim and Nancy bought some long-term care (nursing home) insurance. It is not a huge policy, but enough to fill the gap between their expected retirement income and the estimated cost of long-term care.

However, like many couples their age, Jim and Nancy are into their most profitable years while having low living expenses. Their child-raising years are behind them. They have built a large business and have a low debt-to-asset ratio. This is when their estate is really growing fast.

So they agree making gifts makes sense - if they can see how to afford it.

Incorporating For Gift Giving Jim and Nancy solved this concern by incorporating their business. The livestock, machinery and inventories are owned by the corporation. The land is not. The couple can now gift shares of stock to their children to lower the size of their estate, up to $10,000 worth from each parent to each child every year using the tax-free gift exemption. That $10,000 tax-free amount is scheduled to increase each year from 1999 to reflect inflation.

Jim and Nancy will continue to own more than 50% of the shares of stock in their corporation. That way, they will continue to have control. They probably won't pay dividends so all the assets will remain there to work for the farming business.

They didn't include the land in the corporation for three reasons. First, they will continue to own it personally and will rent it to the corporation. That makes it easy to get income during retirement. It can be difficult and expensive, taxwise, to get income out of a corporation when you don't work for the corporation. Rent from land you personally own is an excellent alternative.

Second, it can be especially tax costly to dissolve a corporation when it owns the land. Dissolution results in taxing all the gain on that land as if the land were sold - even though you aren't selling the land.

Finally, the corporation is saving Jim, Nancy, Todd and Robin an estimated $12,000 of income taxes and social security taxes each year.

Changing Stock Ownership The corporation stock may change hands through several different options. If any of the children want to sell their shares of stock in the corporation, the other shareholders have an option to buy, with Todd having the first option. If any shareholder is divorced and the in-law ends up with shares, those shares have to be sold to the corporation or one of the family-member shareholders.

After the parents have died, the farming child has the first option to buy any of the land from the estate.

Terms such as price and payment can be part of the buy-sell agreement. Often, price will be determined by appraisal. Terms might be a percentage down and 10 annual payments at 1-2% over the current rate for one-year certificates of deposit at the local bank, for example. This means the non-farm children might receive their inheritance over a period of time, but with interest.

On the advice of his planners, Jim asked his mother to change her will and leave her approximately $400,000 of assets to his children rather than to him. Adding that much to his estate was probably going to greatly increase taxes. And, Jim figured he and Nancy would never need the income from those assets.

If they figured they would need the income, Jim's mother could have set up a generation-skipping trust in her will. That way, Jim could have had the income from his mother's assets after her death for the rest of his life. But, those assets would not be part of his estate at his death. Instead, the assets are passed on to Jim's children.

If your parents are unable to draft a new will or if you don't want to confuse them, there's an alternative. You can disclaim your inheritance after your parents die and those assets will go to your heirs rather than to you. It's not as clean, but it will work.

Expand Business, Not Estate There are other ways to expand a business without greatly increasing your taxable estate. Let's use Jim for an example. Jim has agreed that he really doesn't need to own any more land or hogs. Instead, it's the business, not Jim, that may want or need that expansion.

If the 160 acres next door comes up for sale, Jim gives his children the cash down payment for the land. They will use the gifted money to buy the land. The family corporation will rent that new land and the children will use their net rent income to make the payments.

Those new assets then grow in the estates of the next generation, which isn't expected to face estate taxes for another generation. But the assets are still available to the family business to use. Hog expansion from here on will be within the corporation.

Passing on the family business creates tough decisions. But it doesn't have to be as hard as a lot of families make it. You simply have to start planning early. There are a lot of good options.

One final suggestion: Work with estate planners and be sure you work with an attorney who is experienced in estate planning to get all the documents drafted correctly.

As an estate planner, the most common, sad story I hear from clients is about the neighbor who farmed with dad for years on the promise that they will be taken care of.

You know the story. When dad and mom die, the son is in his 50s, owns no assets, and the will says everything is divided equally between the five children.

While the number of children and age of the son or daughter changes, the same story seems to occur over and over.

So, is equal distribution fair when there is a child involved in the farming operation? Usually not.

Is there an easy way to figure out what is fair based on that farming child's contributions and what that child has received in compensation over the years? Probably not.

Beyond Business "This farm has been in the family for more than 100 years," one father explains. He started farming and raising hogs with grandpa on this farmstead. His grandpa started with his father before that. And so it goes.

Dad would will every inch of the dirt and every pig to a son if necessary to be able to go to his grave feeling sure the farm will continue in the family for at least another 20 years - and hopefully forever. To him, that would be fair.

Mom, on the other hand, has her own perspective from experience. Her plan is that every child should get exactly the same, maybe right down to counting out the jars of canned vegetables.

Her brother got 160 acres and she and her sister only got 80 each after both her parents died. She could never see a business reason because she was blinded by the thought: "They didn't love me as much as him."

Neither of her parents ever said anything about why they were leaving more to her brother. In fact, she didn't know about it until the will was read after her mother died. That was also the last time she spoke to her brother.

This is a true story. This sister has a will that leaves all her assets (about 40% of the total) to her two non-farming daughters. Her husband's will leaves most of his assets to the farming son.

Figure It Out, Talk It Out There's no one group plan that will answer the fair or equal question.

The ideas in the companion story about Jim and Nancy and their son Todd should trigger your thinking on a number of things.

Then it becomes a very individual situation. Yours is going to be different than anybody else's. Hopefully, the following questions will spark some good discussion.

Has your farming child been fairly compensated for his/her contributions to the family business?

I've seen cases where the farming child has received a very good salary, lives in a really nice home provided by the farm, is given equity in the business each year, and has been given cash gifts to buy land and life insurance on the parents. There are buy-sell agreements.

That child has also been a dynamo. There's no doubt the farming operation is worth more (a benefit to the off-farm heirs, too) because of his management skills and long hours.

In that case, the parents leave their assets equally to all their four children. They have looked at it carefully and feel comfortable that the farming child won't have any problem continuing his career with that plan.

The equity he has received and the life insurance should keep him in business even though he inherits equally with his siblings. They feel equal is fair.

Going far the other way, I've seen cases that were just the opposite. The farming child provides a lot of labor but isn't allowed to make any of the decisions. He and his family live in the old house. The pay is just enough to get by.

While off-farm heirs have received low interest loans to buy homes, the farming child is told he's the one getting the breaks.

Wills drafted by the parents in those cases go both ways. Sometimes it's equal. Sometimes the farming child does get more.

Is equal fair in those cases? Probably not. If that child is contributing more to the business than he is getting in compensation, he probably deserves more when the parents die.

Will the farming child be able to continue his/her career, make a good living, and be able to retire comfortably at a reasonable time?

Businesses that are leveraged too high tend to be doomed to fail.

I have jokingly told farming children the best planning they could have done was to be born an only child. The more children, the worse it gets. If there are two children and one farms, equal means you might someday have to borrow to buy 50% of the assets. With four children, you might be up to 75% debt to assets.

Realize, too, that people are generally living longer due to better living conditions and health care. That farming child could easily be 50-60 years old or older when his/her parents die. Going deep in debt at 55 years old isn't a lot of fun.

The exercise, then, is to look at the farming child's situation. What will it take for him to meet those goals of living comfortably?

If it would take 75% of the farming assets and you want to treat all your children equally, you and your farming child better be looking at some of the alternatives that Jim and Nancy, and Todd and Robin considered.

When you're ready to retire and none of your children farm with you, the typical decision is to sell the hogs and machinery and end the business.

Frank and Edith Murphy went a different route. They included longtime employee, Frank Heying, and another employee, Todd Root, in their succession plan.

The Murphys formed a corporation in 1993 that owns the hogs and machinery. Heying and Root work for the corporation and also own about 25% of it. The Murphys own 75%. The corporation rents the land and buildings from the Murphys. They farrow-to-finish about 4,500 head annually in the Stuart, NE operation.

Frank Murphy cites a number of reasons to keep the business going after retirement versus selling out.

"To start with, if I had sold the machinery and hogs, I would have had a heck of a tax problem," he says. "We would have lost a lot of the value of the assets before we could have counted it as a retirement fund.

"Second, Frank (Heying) has been around for 25 years and is almost like a son to us," Murphy says. "I wanted to keep him going if he wanted to. And he did want to."

The buildings still had value, he adds. Murphy figures they had five years of low cost use in them before they need updating or replacing.

Going the corporation route allowed the Murphys to get their value out of the buildings. If they had sold the hogs and rented the buildings, Murphy didn't believe they would have got much for them.

Then selling the buildings wasn't a good option, either. The Murphys live on the place and wanted to stay there.

This turn-over plan provided another advantage for the Murphys. They have received a good income over the past five years of retirement while still owning most of the assets.

While the current prices for hogs and grain hurt, he believes their plan has still been better than selling out.

Murphy also figures the machinery has given him a better return by using it to farm 480 acres than he would have had by selling and paying the tax. The corporation now buys and trades machinery and equipment as needed.

The employees have equity in the operation now. If the business were to shut down in the future, they could take that equity with them.

In the meantime, Murphy is very comfortable with the people farming his land and operating his business. Plus, he believes Heying and Root take better care of his land, machinery and facilities than most people who might rent from him.

Finally, the Murphys can go south to warmer weather during the winter. And, when they return, Frank knows he has a place to work and farm a little when he wants.

For more information about a non-technical approach to succession planning for family businesses read: "Passing Down The Farm," by Donald A Jonovic and Wayne Messick. You can order a copy by sending $24.95, plus $4 shipping, to Family Business Management Services, P.O. Box 1610, Cleveland, OH 44120.

Also, "Planmaker: A Succession Workbook for Family Farms" is available at the same address for $59.95, plus $4.50 shipping.