John Phipps: A Major Misconception About Transitioning the Farm

09:26AM Aug 05, 2020
estate planning
There's a major misconception when it comes to transitioning the farm. John Phipps kicks off a multi-part series about planning for the next generation in farming on U.S. Farm Report.
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We received a letter from a farm couple in Illinois, which you can find at the bottom of this story, who ask:

“Can you address the subject of planning for the next generation in farming?”

They letter brought up a number of issues. This is a topic that generates thousands of words of education and advice in the media every year. I claim no expertise in this area, just experience from a handful of transitions and estates I have been involved with in various roles. I will pick a couple of points from their correspondence to comment on. This week, I’d like to look at this common misunderstanding.

“Keeping the Family Farm operable and sweat equity mean nothing to the non-farming family members, money is what it’s all about.”

A few words about sweat equity. First of all, equity is inextricably attached to ownership. The idea of sweat equity is an effort at a way to get around this truth. A good example is a couple buying an old house, working nights and weekends to make renovations. The house is then appraised for more than they paid. That added value – minus their materials cost - would be their “sweat” equity, which is actually just the same as plain old equity. If they had been renting the house, all that increased value would belong to the owner, unless a prior agreement had been reached. Young farmers often come back to the farm and assume that their hard work helping improve the operation somehow gets added into some account in their favor. It does not, as many discover when estates are settled. Regardless of good intentions or assumptions, unless your name is on the deed, all the good faith effort in the world has no legal or even logical basis without ownership. After all, a good unrelated employee can also increase the value of a farm in the same way.

If returnees accept low compensation with the hopes of some sweat equity credit, they will be disappointed. A financial claim based on sweat equity would be impossible to quantify and very difficult to justify to other heirs. This is the reason if young farmers have no ownership share, it is imperative they receive actual compensation that is acceptable on its own – that they are paid a wage that they think is fair. That said, there are other forms of compensation for young farmers from the farm, some of them obvious, like housing often, possibly a vehicle, and so forth. But there are also benefits young farmers often do not recognize or value, but off-farm siblings and heirs do. I’ll talk about them next week, but for this week remember if there is no ownership, there is no equity of any kind.

Letter From Viewer

Subject:  The future of family farms

Farmers today need to be made more aware of how to preserve their farming operations.  Planning to set up a Trust or ‘Will’ isn’t the only thing to do. 

COMMUNICATION is one of the most important things to do.  ALL non farming family members NEED to be included when setting things up too.  If the non farming family members aren’t informed of the intentions of the head of the farming operation there will be resentment, misunderstandings, and other negative reactions.  Keeping the Family Farm operable and sweat equity mean nothing to the non farming family members, money is what it’s all about.  It has been said that “we’ve already made our millions, we shouldn’t get any inheritance at all”!  Just because they’re “family” they have a sense of entitlement even though they have no connection to farming. 

The non farming lawyer (the estate or Trust lawyer) + the farmer’s personal lawyer = money in their pockets.  Farmers need to find a lawyer who knows the business of farming and understands what it takes to keep the business.  When writing up a Trust or Will, it’s all in the wording.  Is there really such a thing as an iron clad Trust or Will?  True colors appear when there is money involved and things can get very ugly.  Estate money is wasted on lawyer bills if family can’t agree and get along. 

More and more small family farms are disappearing and if families can’t follow the intentions of the deceased’s Trust or Will then the bigger farmers get to take over the business.  This is a serious issue that needs to be addressed. 

I know everyone has their own ‘story’, and here’s the short version of mine:

My husband has farmed his whole life.  His parents have both passed away and their wishes to keep the farm in the family have not been granted.  The family has cash rented out the approx. 500 acre farm of corn and soybeans to someone outside the family.  To say the least he is shocked, hurt, angry and very embarrassed. Small towns have a way of believing whom and what they want, making life even more difficult.  

It is my wish to inform others of these possibilities so perhaps they can try harder to make better choices when thinking about how to pass the family farm along to the next generation.  It’s not easy.

Farm Journal Field Days

John Phipps is one of many speakers for Farm Journal Field Days this year. Polly Dobbs will also address estate planning from a legal perspective during the virtual event. For a program agenda or more information about Farm Journal Field Days and the #FarmON Virtual Benefit Concert, which are both FREE, go to www.FarmJournalFieldDays.com. The virtual event can be viewed on-demand. 

Polly Dobbs