The Dangers of a Vanilla Plan

February 20, 2017 01:35 PM
 
Succession_Family

Suppose you have three kids. One is on the farm, and two don’t live there. To keep everything fair, you choose to leave all of your assets equally to your three children. Sounds reasonable, right?
 

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Reasonable, yes—but it’s also dangerous for the future of your farm operation, says attorney Polly Dobbs, who spoke at the recent Farm Journal Legacy Project Conference in Kansas City.

“If you have a simple will that says, ‘Everything goes equally to my kids when both my spouse and I are deceased,’ they become equal tenants in common,” says Dobbs, owner of Dobbs Legal Group and a member of the Farm Journal Legacy Project Advisory Team. “And it’s not a ‘majority rules’ scenario.”

Many people misunderstand the concept of a tenant in common, Dobbs says. “Even if you just own a minority interest, you have very strong rights in how that land is managed, such as being able to force a sale,” she says. 

For example, if your three kids are tenants in common and one wants to cash out but the other two don’t, the decision will be made in court. The judge will order a sale, and each person will receive one-third 
of the resulting cash. 

“If that’s not the overall plan for the family farm,” Dobbs says, “something better than ‘everybody gets an equal interest’ is what ought to be put in place.” As a first step in this direction, consider the benefits of separating the operational assets from the bare land. 

You can do this by creating entities for both the business and the land, advises Paul Neiffer, a CPA and principal at CliftonLarsonAllen and a Top Producer columnist.

“The use of an entity in this case will ease the transfer of ownership to the next generation, reduce liability exposure and let you take advantage of tax-free fringe benefits and entity-valuation discounts,” points out Neiffer, who is also a member of the Legacy Project Advisory Team.

In one entity, you can place grain bins, equipment and machinery, and the farming successor can own it. “Maybe that child buys it, it’s a chunk of their share, or maybe it is just free because the generation writing the plan feels like that’s fair,” Dobbs explains.

Then the land can be divided among the off-farm children according to the parents’ wishes. “Maybe the other kids are landlords and receive cash rent or there’s some kind of crop-share arrangement so they’re still involved,” Dobbs explains. “But they don’t own a chunk of the operational assets because they’re not the ones at home.”

As farmers start this process, Dobbs advises, they should define what is fair, not equal. “Then write it down and tell everyone,” she says. “That way, nobody has to wonder. It’s all laid out with nice and clear instructions.” 

For more on the Legacy Project Conference including presentations for download, visit FarmJournalLegacyProject.com

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