The businessman Henry Ford once said: "Coming together is a beginning. Keeping together is progress. Working together is success." This quote rings true for farm businesses—and family farms that remain a cohesive unit through several generations typically show a competitive advantage.
The following are real-life examples of how the value of planning affected two family farms for four generations. Both operations farmed during the same time period on similar soil types, under similar market conditions. One family chose to plan and formalize their agreements and the other family did not. As you will see, the results are dramatically different.
FAMILY FARM #1
This family raised five children on a traditional Midwest farm operation. The first generation (G-1) developed a real pride in their heritage and wanted their children to share in their estate equally. They visited an attorney who advised them to put their land into a corporation to preserve the land for future generations. Their accountant suggested a C corporation to allow additional tax advantages. G-1 spent approximately $10,000 to incorporate the business and also incurred the additional cost of annual tax filing and more complicated record keeping. During their lifetime and in their estate, G-1 passed equal amounts of corporation stock to their children (G-2). At their death, the corporation owned 720 acres of farmland.
FAMILY FARM #2
This family also raised five children on a Midwest farm. The oldest daughter married a local man and farmed nearby. The oldest son began farming with G-1 after high school. The third and fourth children had offfarm careers and were not actively involved in the farm. Fifteen years after the oldest son began farming with G-1, the youngest son joined the farm. The farm had grown to 720 acres. But G-1 ignored the planning advice of attorneys and accountants. Upon death, G-1 passed 240 acres of land to each of the active farming children: the oldest daughter, the oldest son and the youngest son.
KEPT ASSETS TOGETHER
Farm #1 continued to operate as a family farm. Two of the G-2 children chose to redeem their stock. In order to afford their redemption of the corporate stock, the corporation sold 120 acres of farmland. The three remaining G-2 partners farmed together, drawing regular salaries and benefits from the farm business.
During their lifetime, the farm corporation grew to own 1,500 acres, rent other land and include livestock. Two sons and a daughter (G-3) took over management of the farm and worked for the corporation. All nine of the G-3 cousins owned shares of the corporation (land) after the passing of G-2. Many redeemed their shares back to the corporation or sold their shares to the actively farming G-3 cousins.
Tax laws changed and it became a disadvantage to own farmland inside a corporation. So the corporation began purchasing land, using working capital saved inside the corporation, by acquiring a 25-year interest in new farmland, and the G-3 family members purchased the remainder interest. This effectively moved corporation profits to family members.
Restrictive agreements were drafted so that the split purchased land would always be available to the family farming operations, either as rent or with a first option to purchase.
Today the family farm continues to offer opportunities for five separate families to benefit from the lifestyle it provides. The family owns 3,200 acres of farmland and operates 6,000 acres. The G-4 generation controls operations and the G-3s have retired.
DIVIDED FARM ASSETS
The G-2s of farm #2 each farmed their inherited land independently. The oldest brother resented the younger brother receiving an equal portion of farmland and the two brothers did not remain friendly.
The sister and her husband sold her farm to the younger brother. During his lifetime, the younger brother purchased an additional 160 acres of farmland for a total of 800 acres. His two children did not farm, and when he retired he rented his 800 acres of farmland to a neighbor who was not a family member. The older brother also purchased another 160 acres of land for a total of 400 acres.
The older brother had five children (G-3). His oldest son worked in an agricultural-related business. His three daughters did not farm. The youngest child, a son, remained on the farm and worked for his father. He did not take ownership because the father wouldn’t relinquish control. G-2 didn’t want to pay taxes (if he retired) or do any estate planning. He promised his son that someday the farm would be his as payment for working with his father.
The G-3 son wasn’t able to expand or develop his farm operation without his father’s support. He would have liked to rent more land, including his uncle’s 800 acres, but because of the hard feelings between his father and uncle, that opportunity was lost.
If the family farm land base had remained whole, G-3 would have had 1,200 acres to leverage and grow his farm. Instead, the farm base shrank to 400 acres. Due to a lack of planning and no legal documentation, upon the death of G-2 the court system divided the land into five equal parcels. The farming G-3 son retained control of a land base of 80 acres and was unable to provide an opportunity for his own son to farm.
During G-2, farm #2 actually had more acres under their control than farm #1 because the farm corporation of farm #1 had to sell land to buy out two G-2 siblings. Farm #1 also was subject to changes in tax law that affected the original plan.
But by having a formalized plan and working together with the goal of honoring great-grandpa’s desire to continue the family legacy, farm #1 is competitive today and continues to prosper. Good planning continues to provide an avenue for the family to work and raise their children on the farm.
- Legacy Project 2010 Report