Farm Estate and Succession Planning
This blog focuses on making complex and difficult topics in estate and business planning understandable and applicable to the reader.
Treating your Farming and Non-Farming Children “Fairly and Equitably” - How??
Jun 13, 2011
I have the opportunity to work with many farm families, helping them build a plan for how their assets will be distributed at death. I have found that there are two similarities many of these families share. One similarity is that there are usually both farming and non-farming children in the family. Another similarity is that the major assets in their net worth are farm related (land, shares and machinery).
This leads to an inherent conflict that has to be dealt with: the parents want to ensure that the family farm is able to survive and thrive with the next generation. However, at the same time, they want to provide an inheritance for their non-farming children. I call this conflict the "fair and equitable" treatment of your children. What is fair and equitable is different for each family. This article provides some tools to consider when defining what fair and equitable is for your family.
Treat Farm Assets as Business Assets
Sometimes parents are comfortable with treating farm assets as business assets, and keeping the business separate from everything else. In this situation, at death the farm assets go with the farm business, leaving them to the farming child. The non-farming children will receive the separate non-farming assets. This usually results in a disproportionate distribution; which is fine, as long as the parents feel this is fair and equitable.
Many times this is not a feasible option, because the only assets to distribute are farm / business assets. In this scenario, the usual choice is to quickly add non-business assets (life insurance), or move on to a different plan.
Compensating Farm Children for Their Work on the Farm
On occasion, families are able to define what "fair and equitable" is by accounting for the farming child’s contribution to the farm over the years. Here, the parents may look at what the farm was when the child began their career, and compare that to what it has grown to now. That difference is accounted for by giving the farming child more of the assets as "payment" for their efforts. (This is one of many formulas to use to figure what fair "payment" is for their family.)
This is "fair and equitable" in some parents’ eyes, because they compare the situations of their non-farming children and the career paths they chose. Through these careers, they have had the opportunity to build their own retirement plans. The farming children have their career in farming, but their "retirement" plan is usually tied up in the farm. It is "fair and equitable" to these parents to give more of the assets to the farming children, as their share of the equity and as their retirement.
What if "Equal" is "Fair and Equitable"?
Sometimes parents feel that equal distribution of assets is "fair and equitable." In this scenario, often the solution is to position the assets so that they are distributed equally, but also available to the farming child. This ensures the farmer that the necessary farm assets will always be available to them, even if they do not own them. The tool often used to accomplish this is called a "first right of refusal".
A first right of refusal provides ownership of assets (land or beet stock usually) in non-farmers with a condition. If the non-farmer wants to rent the asset, he has to first offer it to his farming sibling. If the non-farmer wants to sell the asset, he has to first offer it to his farming sibling. The hopeful goal is that the assets are always available to the farming child, and he doesn’t find himself in a bidding war, especially in today’s competitive market for acres.
The tools discussed in this article are good places to start when considering your own plan. However, this is just a starting point and is a very broad explanation of some options. Every family is different, and therefore each plan must be different, in order to work as the family intended. Accordingly, it is absolutely crucial that you seek professional assistance when developing your plan. I wish you the best in this endeavor, and would be honored to help you achieve your unique definition of "fair and equitable".
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