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Fair Versus Equal: Solving The Farm Succession Puzzle

Farm Journal Editors

When a farmer passes an operation to the next generation, the inheritance can be fair, but it is rarely equal. There is no precise model when slicing the estate pie and the perception that every piece must be identical often adds unnecessary complexity to the puzzle.


What is a reasonable succession plan that affords an operation the best chance at a beneficial continuation with the next generation? Polly Dobbs, owner of Dobbs Legal Group, specializing in estate planning and farm succession, offers several guidelines.


Teeter-Totter


Life rarely moves in straight lines, and an unexpected death or unforeseen circumstance within a farm business can jeopardize an operation if succession plans are neglected or reliant on a sickbed declaration. Likewise, if the inheritance goal is to pass the farm successfully to the next generation, and if all the children are not directly involved in the operation, it could be a disaster to divide all assets equally between children, according to Dobbs. “If your kids are not involved in business together during your lifetime, then don’t throw them together for the first time after your death,” she says.


An ideal, simple split might funnel all farm assets to children who farm, and everything else to non-farming children—give the farm to whoever farms. However, the breakdown is not typically so clean: “Unfortunately, that usually leaves the teeter-totter askew, with millions of dollars on one end going to a farm kid, and something like a house and small bank account going to another kid,” she explains. “On most operations, farmers invest their money back into farm, and there is typically not much else but the farm.”


A remedy is sometimes to designate a corresponding sum of life insurance designated to the non-farming child. “Most farmers don’t like insurance premiums, but it’s an option, and it doesn’t need to be penny for penny. A farm might have ground that appraises for $10 million, but you don’t have to give the off-farm child $10 million in insurance. The non-farming kid gets real dollars to put into a bank account, but the farm kid gets dirt and equipment in order to make a living. You only have to insure for an amount you feel is fair.”


To designate a corresponding sum of life insurance designated to the non-farming child. “Most farmers don’t like insurance premiums, but it’s an option, and it doesn’t need to be penny for penny. A farm might have ground that appraises for $10 million, but you don’t have to give the off-farm child $10 million in insurance. The non-farming kid gets real dollars to put into a bank account, but the farm kid gets dirt and equipment in order to make a living. You only have to insure for an amount you feel is fair.”


Sweat Equity


A succession solution often relied upon by farmers is separation of operations and land, allowing multiple children to co-own the land, with restrictions to ensure the land base is available to the successor-operator. “It can be really difficult, for example, if an off-farm daughter wants to convert her one-third ownership of farmland into cash right away, and the on-farm sibling has to go into the hole to complete the buyout,” Dobbs explains. “It can be a good balance to lock the land ownership up for a period of time, with a first right to lease to the operating child, if you have the right terms in place to make certain the siblings don’t take advantage of one another.”


Dobbs paints a representational picture to illustrate a potential solution for a mix of on-farm and off-farm children: “If the sons who farm with mom and pop buy into the operating assets, such as machinery, the grain setup, machine shed, shop, etc., or earn their way into ownership through sweat equity while Mom and Pop wind down towards retirement, that can really help, because the operating piece has already been handed off during their lifetime.”


“The sons on the farm have likely forgone things like competitive salaries and retirement matching plans that would have come along with the off-farm jobs their peers pursued, instead choosing to work alongside the folks to help grow the farm,” she continues. “Such sweat equity might justify a discounted buy-in price during lifetime, or perhaps a gift of certain machinery at trade in time, with the sons picking up the tab for the replacement purchase.”


“The estate plan can be structured to complement this, so that if mom and pop die before the lifetime transition is complete, the operating assets are directed to the sons who are on the farm, either off the top, or such that they receive less of other assets,” Dobbs adds. “Then the land can be equally co-owned by all children, with protections in place to give the sons the right to lease the land at a reasonable benchmark rate. This allows the off-farm daughter to have a stream of income off the land, without requiring the brothers to have to buy out their sister.”


Soul Searching


Regardless of what type of succession plan is considered, Dobbs emphasizes the unique nature of each operation. There is no one-size-fits-all on a farm: “Literally, every farm is different. It’s a disservice if a lawyer gives the same formulaic plan to every farmer who walks through the door. Time and effort need to be invested into the plan to ensure the details are right and will work, and it should be customized for each family.”


A significant red flag or potential hazard is often a blended family, Dobbs says. “When you’re involved with stepparents, stepchildren, or half siblings, there can be a lot of unintended consequences if things aren’t planned accordingly. Problems also surface when parents leave everything equally to children, and the ones who farm have to buy out the ones who don’t. Financially, a buyout may be impossible, and it can be very tough to grow a farm operation if you have to stop and buy out your siblings.”


For families considering a succession plan, where is a baseline starting point? Soul searching, Dobbs urges. “Soul search and brainstorm before you find a lawyer. You’ve got to have a foundational idea of what direction you want to go. As an attorney, it’s very difficult to help a family who show up emptyhanded and want to be told what to do.”


In conclusion, Dobbs recommends collecting a heavy amount of reference information: “Attend or listen to seminars or to Extension workshops that go through scenarios and case studies from other families. Give yourself permission to treat your children differently, and focus on finding what feels like a fair balance for your family farm. Brainstorm first, and then go to a lawyer to hone the details and fine-tune. Let the lawyer turn it into legalese and help make certain the plan is right.”


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