Successful Farm Estate Planning for Your Family Farm
Family farms are the backbone of America. The countryside is dotted with them. They are integral to small communities. Some have been passed on through many generations and have shaped the land around them. Most of all, they are dearly beloved by the families who spend so much time making them successful. It’s in the best interest of American agriculture that the farm families that run these farms continue for many generations. How to help keep them going? Farm estate planning.
Estate planning is not a term that most people find especially joyful. And when it comes to farm estate planning for families the term usually comes with it confusion and possibly some tension among the family. However, it is best for the long-term vitality of the farm and for the potential heirs to create a plan to divide the estate when the parents are ready to retire. Its imperative that farm owners be ready to consider an all encompassing estate plan that will successfully enable the smooth transition of the farm to their heir and keep the family together.
There are solutions for families facing this situation. First, the parents should expect to clearly address their vision for the future. Heirs may have an idea that they want to see for the future of the family farm but ultimately it is up to the parents to come up with the plan and present it to the children. Keeping in mind, many people don’t like change but they are even more adverse to surprises especially when the situation can be emotional. It’s important to keep the harmony in the family by creating a clear and concise vision, which has been communicated to the heirs. This keeps the family together and a part of the process.
Next, likely one family member has been working the farm and has been groomed to inherit the business. It’s important to address the farming heir and to keep non-farming family members in the loop. The farming heir needs to know the important information pertinent to the running of the farm but the non-farming family members should know the basics of the farm. Who owns the land? Are there large notes on the farming equipment? This will make the family aware of the situation of the farm. Most farmers are heard to say they are land rich and cash poor. Many of their assets are in land and equipment not ready cash. Knowing this information could make the process easier to understand for the non-farming heirs.
Split the farm
One solution to the succession of the farm is the splitting up of the farm equally between the heirs. The farming heir then can pay rent to the non-farming family members. This could keep the non-farming family members a part of the farm and could allow them to be generous to the farming heir renting the parcels at or below the average for the region. The day-to-day operation of the farm falls on the farming heir but large decisions of the farm would be decided amongst all the farm heirs.
However, there are risks to this plan. The farming heir has likely spent all of his time working on the farm and may not have the cash available to start paying rent right away to the non-farming heirs and may even resent that he should do so at all considering the non-farming heirs did not work on the farm. Likely the farming heir has not worked for a large wage during his time on the farm and his future is more intertwined with the success of the farm than his non-farming siblings.
The time the farming heir has put into the farm is referred to as “sweat equity”. This sweat equity can be put into numbers and dollars. The family can look at the size of the farm when the farming heir started working and the size of the farm at the time of the estate planning. The farming heir can then be paid for helping to grow the farm, which could give the heir the cash needed to pay his non-farming siblings for the rent of the split land. This also can work to mitigate feelings from so many years of hard labor helping to grow the farm.
Another option for farm families is the purchase of the farm from the parents. This option brings with it a few considerations. What is a fair selling price? The parents cannot sell their farm at a low price, as they must look after themselves during retirement and the children may not be able to go into a large amount of debt to buy the farm even at a fair selling price. The family has the opportunity to discuss a payment plan with the parents. This will keep the parents comfortable in retirement and keep the children from going into a large amount of debt. Again, these considerations must be talked through openly and honestly among the family to keep the family working together.
Purchase on death
Another recourse is to wait until the parents have passed away to buy the family farm. The parents and heirs may be able to decide beforehand how much the farm could be worth in the future looking at the growth in the past. This gives the heirs the option to financially plan in advance. It also gives the parents the opportunity to set a fixed price for the heirs. The issue of sweat equity could be credited to the farming heir lessening the amount the farming heir will face in the future.
It is important for the running of a family farm that no one is caught off guard. Whether your farm is worth a little or a lot it is crucial to engage in farm estate planning in case of an accidental death. During the grieving process your family should be relieved knowing that the legalities affecting the farm have been taken care of and they can grieve in peace.
Keeping the family harmoniously together is of the upmost importance and an estate plan will help you achieve that goal. Having an estate plan before retirement or death is the smartest way to ensure success for the family and for the farm. Many a family farm has been lost due to poor planning but all of those concerns can be avoided when the family can take an honest look at the farm. Change is emotional and a family farm is the site of much hard work. Ensure your family farm the success of many generations by utilizing creative solutions and talking openly and honestly with each other.