Farming With Family and Importance of Planning for the "What if’s" in Life
May 23, 2011
Many farmers I work with have an operation where they farm with a family member; either a sibling or relative. The most prevalent example of this involves a farming operation where two or more brothers are working together in "one" operation. This might be in the form of an entity (partnership, for example), or a situation where all involved are separate farmers (sole proprietors) but share expenses, machinery and equipment, land and profits. There are many positives to this type of operation: pooling resources and labor helps with farming efficiencies and profitability. Often times each person in the operation has found their "area of expertise", be it mechanics, marketing, farm management, agronomy or others. They all do their part, and the operation flows as smooth as possible.
There are also potential negative implications to this type of operation. Working together through the years has likely proven efficient, but it has also likely led to a complicated ownership structure where everything is "tied" together. Likely, all of the machinery and equipment may be owned jointly. Neither owns a "whole piece" of the asset. Similarly, joint ownership of the land, farm building site and other farm assets is likely as well. If all is going well, this is not a big deal. But, what happens if there’s a change, or if something goes bad?
When you are "tied" together in a joint ownership structure, what happens if there’s a death? What happens if there’s a disability? What happens if there’s an argument and you can no longer work together? What happens if one brother has a child that wants to work into the operation, and the other doesn’t? What happens if one brother wants to retire, and the other doesn’t? What’s the plan?
I imagine many responses to these questions to be: "We can work all of this out when and if that time comes. No use worrying about it now if it hasn’t happened." This response is a recipe for potential disaster. Don’t believe me? Let me paint a picture in your mind, as to what you would have to deal with to "work things out" if something bad happens.
Imagine you are farming with your brother, and own almost everything together. You share machinery, equipment, and a farm / building site. You own most of your land together, as undivided equal owners. You share all expenses and profits, and work load. Things are going well. One day your brother has an untimely death. Reality has just changed from good to awful. The sadness and stress for your family and your operation is at an all time high. Not only have you lost a brother, you have lost your business partner and a crucial member to your operation. You wonder how things will work now that he’s no longer there. What’s the plan?
Now picture his wife. She has just lost her husband and is overwhelmed with grief and fear. Further imagine that this newly widowed woman has very little to do with the farming operation, being busy with her own work off the farm, her children and with all of life’s demands. These demands on her time have not provided her with the "day to day knowledge" of the farming operation. All she knows is that there are a lot of expensive assets and that there are liabilities against those assets. She knows because she signed the notes for them as your brother’s spouse. She wonders how she will pay for all of those liabilities, and support her family.
Now picture the time when your brother’s estate is being administered. Imagine yourself sitting down with your brother’s widow, and her estate planning professionals and the discussion begins on what happens with the jointly owned farming assets: your machinery and equipment, your farm site and buildings, your land. You share assets, but you do not share goals for the future. Your goal is to continue farming. Her goal is to make sure she receives her assets and can pay off her debt and support her family. What’s the plan?
With this picture in your mind, I’ll ask the question asked earlier again: "How will things work out?" If your answer remains "it will work itself out; no need to worry about it", frankly, that’s not realistic and that mindset can be disastrous for your business. There is no doubt it will "work itself out", but the frustration, anguish, expense and stress will likely be overwhelming both financially and emotionally. Moreover, your farming operation may be at a point where you as the surviving brother are no longer financially able to farm in a viable manner. No one wants this, but without planning, it can easily be reality.
So, what can you do? The key to avoiding this and many other similar situations is to proactively plan for them using a method known as a "buy-sell agreement." A buy-sell agreement is a document where all owners of a business proactively plan and agree on a course of action in the event of death, disability or departure (break up of the business.) Think of it as being proactive: having a clear, fair way to handle any of the above referenced situations. A buy-sell agreement is a "roadmap" that outlines how the farm would continue in the event of death, disability or departure. Additionally and equally as important, it outlines how the families would be taken care of as well, should something happen. It puts everyone "on the same page" with the operation, and know that a plan is in place, should something happen.
Let’s Re-visit the above example with the brother’s untimely death. Assume everything is the same, except the families took the time prior to brother’s death to complete a buy-sell agreement. This agreement specifically outlined a plan of action in the event of a death so the farm could continue to operate, and the family of the deceased brother was taken care of as well. Imagine you as the brother, and the peace of mind you would feel, knowing everything is in place. Imagine you as the widow, and the peace of mind you would feel, knowing everything is in place. Everything was decided ahead of time, and everyone’s needs were met.
Buy-sell agreements are very important in any business, but especially in farming. These documents are built specifically for each operation, finely tuned by your professionals to meet your goals. It is absolutely crucial from a business standpoint to work on this. If this is something you have not done, I strongly suggest you sit down with your professionals and build a plan specifically tailored to your unique situation. It will be well worth the time and effort.
Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information.
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.