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.
Buy-Sell Agreements - Very Important when co-ownership is involved!
Nov 18, 2011
Often I work with farming entities: partnerships, corporations, LLC’s. Other times I work with individual farmers who work “together” with another individual farmer, sharing many expenses and profits, along with machinery and equipment. In all of these situations I am a strong advocate for the need of a “buy-sell agreement.”
A buy-sell agreement deals with what happens in the event of death, disability or departure. Nothing has happened to any of the ‘main players’ now, but what if something does? Think of it as being proactive, and having a clear, fair way to handle any of the above referenced situations.
One area to look at when designing these is what happens at death. If a co-owner of a farming entity passes away, many questions would be immediately asked, both by the surviving co-owners and the heirs of the deceased co-owner. Some of them would be easy to figure out. For example, the grain would be split based on the ownership shares, along with the expenses and liabilities. The machinery is often the difficult question. In the case of a death, we have two conflicting interests. The surviving owner(s) will likely remain farming. The deceased owner’s family perhaps will not, and therefore no longer needs the machinery. The surviving owner(s) cannot likely pay off the deceased owner’s family in full, immediately at death for their share of the machinery. At the same time, we do not want the deceased owner’s family to go without their full share of the machinery, as an asset of deceased owner’s estate. Accordingly, there have to be some clear fair decisions made. The buy-sell agreement is the way to do it.
The agreement could contain the following split: assume there were two co-owners of a farming operation and one of the owners died, leaving his assets to his widow. The value of the machinery would be split 50/50. The fair market value would be determined by an independent appraiser. The surviving partner, as the continuing farmer, would receive his choice of the pieces of the machinery line, necessary for him to continue farming as a sole farmer. Remember, the farming operation for the surviving partner will change considerably, because he lost his working partner. Down-sizing would be a likely occurrence in this situation. Accordingly, the remaining partner would receive their ½ of the machinery in this way. The remaining ½ would go to the surviving spouse. She would then sell it and receive the proceeds as cash. If it ended with an uneven split, then the surviving partner would compensate the widow with dollars to even the distribution.
The above option with machinery is one of many options for one of the many questions that buy-sell agreements need to address. They are absolutely crucial in any farm where there are two or more owners involved. Proactively planning for the “what if’s” in life is very valuable. Trying to “pick up the pieces” and reactively plan after something has happened is very difficult and emotionally and financially stressful. Avoid that potential scenario. Plan for your farm’s future by completing a buy-sell agreement. It’s something you hope you do not have to use, but are very glad to have it if you do.
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