Philip E

1. Pam Johnson and her sister Patty inherited their parent's farm, which is located in Wisconsin, in 1988. They received title to the farm from their mother's estate as tenants in common. The farm was valued at $300,000 on the date of their mother's death. Pam and Patty decided they would operate the farm themselves rather than rent it to someone else but they did not have an agreement on what to do with the farm.

Pam was a veterinarian and had a practice that she did not want to give up. She decided to put in two acres of strawberries on the farm and run the patch as a pick-your-own operation.

Patty quit her job as a school teacher and devoted her full-time effort to raising crops and milking cows on the rest of the farm. To make the milking easier and to increase her herd size, Patty borrowed $400,000 from Third State Bank to build a new milking parlor, loafing shed and silos and to buy some new cows. As a condition for getting the loan, Third State: (1) required Patty to sign a promissory note for the loan; (2) required Patty to sign a security agreement giving Third State a security interest in all of Patty's machinery, livestock and crops; and (3) required Pam and Patty to give Third State a first mortgage on the farm. The PCA immediately filed the security agreement and the mortgage at the proper county offices.

When property taxes on the farm came due for 1988, neither Pam nor Patty had any profits from the farm to pay the taxes so Pam paid the taxes out of profits from her veterinary practice.

In 1989, Third State would not give Patty a loan to put in her crop. Therefore, Patty went to the PCA to get a crop loan. On the loan application form, Patty stated that she and Pam were partners and listed all of Pam's assets on the financial statement. Based on that application, the PCA gave Patty a $30,000 loan for which Patty signed a promissory note and a security agreement giving the PCA a security interest in her machinery and all crops she raised on the farm.

Patty had trouble paying off the PCA loan in 1989 and barely kept up with payments on the loan from Third State but did make all the payments. Neither Pam nor Patty had money from farm profits for the 1989 property taxes so Pam paid the taxes out of her veterinary practice profits again.

In 1990, PCA renewed Patty's crop loan based on the previous year's application. Patty borrowed $30,000 and signed a promissory note and a security agreement giving the PCA a security interest in her machinery and crops. The PCA immediately filed the security agreement with the proper county office.

At the end of 1990, Patty was behind on her payments to Third State and had paid none of the loan from the PCA. The farm, including the dairy facilities Patty built, was worth $250,000. Patty's machinery was worth $45,000, her cows were worth $55,000 and her crops (now harvested) were worth $25,000. Patty's debt to Third State, including accrued interest was $410,000. Patty's debt to the PCA, including accrued interest, was $32,000.

By the end of 1990, Pam had realized no profits from her strawberry patch but had established a good stand that promised to be very productive in the future. The value of the strawberry patch was $20,000.

a. (25 points) Third State and the PCA both sue Pam and Patty to collect on the loans they have made. Discuss the arguments that can be raised for Third State, the PCA, Pam and Patty. What do you think will be the result of the suits?

b. (10 points) Does Pam have any claims against Patty? If so, for what? Discuss Pam's arguments and Patty's arguments in response. What do you think the result will be?

c. (15 points) In July of 1990, a customer of the patch injured his back while picking strawberries. He has filed a suit against Pam and Patty seeking $50,000 in damages. Discuss his arguments, Pam's arguments and Patty's arguments with respect to the suit. Who do you think will win? Why?

2. Beverly and William have lived in Wisconsin since they were married in 1975. Beverly owns and manages a construction business and William works for the state. At the time of their marriage, Beverly and William owned the following assets with the fair market value indicated and owed the following debts.

Owner Item FMV Debt

Beverly Warehouse $200,000 $160,000

Beverly Equipment 75,000 25,000

William House 60,000 50,000

William College loan -0- 10,000

William Lake cottage 15,000 -0-

After the marital property law became effective in Wisconsin, Beverly and William decided Beverly needed to keep all of her business assets in her name alone so that she could do business without getting William's signature. Therefore, on March 15, 1986, they signed a marital property agreement that treats all of Beverly's construction business income as her individual property. At that time, Beverly and William owned the following assets and owed the following debts. The person to whom the property is titled and the fair market value of the property is also shown.

Title Item FMV Debt

Beverly Warehouses $600,000 $400,000

Beverly Equipment 575,000 500,000

William House 100,000 80,000

William College loan -0- -0-

William Lake cottage 30,000 -0-

After January 1, 1986, William and Beverly paid one-half of their living expenses out of William's pay check and the other half out of profits from Beverly's business. The monthly payment on the debt and property taxes on William's house was included in the living expenses. Beverly bought all of her business assets out of profits from her business. William used part of his paycheck and his vacation time to fix up his lake cottage.

Beverly just read an article in her trade magazine about a construction contractor who was found liable for $1 million of damages caused by an accident at a construction site. The contractor lost all his business and personal assets to pay the damages. The article made Beverly think about a better way to own and operate her construction business. When she raised the issue with William, he said he had been thinking about their need to do some estate planning. Consequently, Beverly and William have come to you for some advice about how to organize Beverly's business and how to plan their estate. They now have two children to whom they plan to pass their estates when they die. When they come to see you, they bring a balance sheet that shows they own the following assets and owed the following debts. The person to whom the property is titled, the fair market value of the property, and its basis are also shown.

Title Item FMV Basis Debt

Beverly Warehouses $900,000 $950,000 $300,000

Beverly Equipment 800,000 200,000 300,000

William House 120,000 90,000 70,000

William Lake cottage 50,000 20,000 -0-

Beverly and William ask you the following questions, please answer them.

a. (25 points) What are the advantages and disadvantages of incorporating Beverly's construction business? Would you recommend that she incorporate the business? Why or why not? What additional information would you ask from Beverly and William to help you answer these questions?

b. (25 points) What estate planning problems, if any, do you foresee? Fully explain the problems you foresee, or if none, the reasons there are none. If there are problems, what would you suggest to solve them? Why?

3. (10 points) Mike and Mary are married and have two children who are nine and eleven years old respectively. Mike and Mary are considering the purchase of life insurance. What factors should they consider to determine how much they should purchase?

4. (5 points) What are the advantages and disadvantages of paying non-cash wages for agricultural labor?

5. (5 points) What requirements must be met to have a valid will in Wisconsin?