Leave A Legacy: When the Answer Is “No”

January 25, 2013 08:36 PM
Leave A Legacy: When the Answer Is “No”

Q I am a farmer with five years of experience farming on my own. I rent all of my cropland from my grandparents. Recently, I asked my grandpa if he would ever be interested in selling me some land. He quickly replied, "No." He explained he would lose too much money to capital gains taxes. He also said that the only fair way to deal with the land is to divide it equally between his two children (my mother and her brother, neither of whom farm) when he passes away.

My concern is that this kind of estate plan might considerably reduce my acreage and income  potential. It also might hinder my ability to continue farming full-time.

I’m not fighting with my grandpa about this; we get along quite well. We just don’t see eye-to-eye on this matter. Can you help me form a line of reasoning that might help him see the situation from my point of view?

A I suggest you start with a clear objective. Your grandfather will respond more favorably if he knows you’ve thought through the issues, are concerned about the future of the land and are not seeking special treatment. Presenting him with potential solutions that address his concerns, especially those related to his own children, can also help move the process forward.

Appealing to his emotions and supporting your proposal with sound
reasoning is the
best approach

It sounds like your grandfather has two concerns. The first is to avoid additional taxes by not selling the land. Allowing it to transfer in his estate does generate a step up in basis to current market value—it means the property transfers to your mom and your uncle at the current land value. On the flip side is the estate tax, which will depend on the exclusion amount and tax rate in effect at the time of his passing.

Also, he’s stated that an equal division between his two children is the only fair way to pass on the property. It’s a nonstarter to argue that equal is not fair to you; that approach is unlikely to bring resolution in this situation. Given his stance, money or promissory notes are easier to divide than land.

Offer him a real solution, one that demonstrates your commitment to help resolve the issues and makes him realize there might be other alternatives he should consider.

With proper planning, and assuming your grandfather is in good health, you might be able to fund the purchase (or a portion of it) with life insurance on your grandfather. By doing this, the transaction will avoid capital gains and your mom and uncle will realize full value for the property.

If you can’t afford the insurance or your grandfather doesn’t qualify for coverage, you can still  help him satisfy his goals through a buy-sell agreement. In such a case, you might negotiate a long-term lease with an option to buy. The agreement should include the terms and conditions for buying the property, including how to determine land value, terms of a note, what might trigger the buy-sell transaction, etc. The goals should be stability for your farming operation, options to continue farming, and a fair return to your mom and uncle for the assumed risk.

Appealing to your grandfather’s emotions and supporting your proposal with sound reasoning is the best approach. If he does not realize that the situation can be solved and satisfy all parties, you might not be able to change his mind. If that’s the case, seek other land-lease opportunities. In the next 10 to 20 years, a multitude of farm owners will retire. Of those, many will appreciate the opportunity to work with a young, ambitious farmer who will care for the land and act with an owner’s regard.

To access a library of tools to aid in the succession planning process, visit www.farmjournallegacyproject.com/tools

Kevin Spafford serves as Farm Journal’s succession planning expert. His firm, Legacy by Design, guides farmers and agribusiness owners through the succession planning process. Send questions and comments to Legacy by Design, 2550 Lakewest Drive, Suite 10, Chico, CA 95928, (877) 523-7411 or legacyproject@farmjournal.com.

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