Dividing farm assets equally among children usually doesn’t work
One of the toughest conversations farm families have is how farm assets will be distributed after the senior generation passes away.
But as difficult as it is, it’s a conversation that farm families must have. And the sooner the better, says Margaret Heiser Fulton, an estate planning attorney in Auburn, Calif., with Robinson, Lyon and Fulton.
"In my view, transferring property at death is way too late," she says. "The hard-working senior generation has to start now and plan."
In non-farm families with a house as the only real estate and stocks and bonds as the major assets, dividing the shares equally among the children is fairly easy. The estate trustee sells the house, cashes in the stocks and bonds, and distributes the proceeds.
Farm families are very different because the major asset is often the farm itself. If one child is farming the land and the other children live away from the farm, dividing up the land or selling it usually isn’t an option.
If the land is divided equally among the children, the child farming the land might not have the wherewithal to purchase the non-farming siblings’ share. And if the non-farming siblings’ land shares are sold to others, there likely won’t be enough of a land base left to provide a viable business
To facilitate a workable solution, the senior generation really needs to do three types of planning:
- Estate planning: Who will receive the assets in the event of death?
- Succession planning: Who will run the business, and who will own the business assets?
- Business planning: Will the business be viable, especially if the land is split up and sold?
If you want the farm business to continue after your death, these are critical questions. No one answer fits every family, Fulton adds.
For example, if the senior generation has been married to each other for many years and the only children involved come from that marriage, the parents intimately know the personalities of everyone involved.
But the reality today is that many farm families are blended families with remarriages and stepchildren. How all of these folks get along, especially if there are children involved who did not grow up on the farm, adds another level of uncertainty.
Legal business entities, such as a limited liability company (LLC), can be created to protect the land assets for the farming children. Then separate legal entities, which lease the land, for example, can be created to allow the farm to operate.
In turn, the non-farming children can then receive fair market land-lease payments as their continuing share of the inheritance.
But creating these entities can have its own set of legal and tax consequences. That’s why you need legal and accounting expertise and close familiarity with your state’s laws from the beginning, Fulton says.
"With good planning, you can successfully pass the farm to the next generation," she says. "It won’t be easy, but it can be done."