Producer question: I have three children, one of whom has joined the pork production business. I want to secure the operation for my son, but remain fair to the other two children. What action should I take to plan for the future?
Dunteman’s response: I spend a great deal of my time working with farm families, helping them plan for the future. My role is to educate the family members on the options and potential problems that their businesses might face.
Often, I consult with them on passing the farm from one generation to the next. Most parents agree that the business should be divided differently between farming and non-farming heirs. Children involved in the farming enterprise have made a commitment to the business – it’s their source of income and their future. The other children are entitled to a share of the business after the parents’ departure – but those children also have established their own income sources.
Unfortunately, many parents do little forward planning to protect the children who are active in the farm business. Often, parents will address the issue with the following language in wills and trusts: “I will allow the farming heirs to buy out their brothers and sisters at fair market value.” Some plans will identify a specific purchasing interest rate, provide a discount from fair market value or outline the terms of the sale.
While the previous language appears to solve the problem, it ignores one significant factor: What happens if the farming heirs aren’t able to generate the cash flow needed to purchase the business from the other heirs?
Three potential solutions exist.
1. You can provide non-farming heirs with cash or non-farm assets as an inheritance, leaving the farm assets to the farming heirs. However, this isn’t always possible.
2. The parents could get a life insurance policy to provide the farming heirs with enough cash at the time of the parents’ deaths to make a down payment to purchase the business from the non-farming heirs. This should allow enough money to cash flow the purchase. However, life insurance can be an expensive solution, and Mom and Dad may not be able to get a policy if they have health problems.
3. Set up a trust. This is the simplest and cheapest option of the three. Placing the real estate into a trust at the time of the parents’ death forces the farming operation to remain together until a predetermined time. This timeframe allows the farming heirs to buy out the non-farming heirs.
The best overall plan may be to ensure that the farming heirs receive the operating assets, while the non-farming heirs receive real estate held in a trust. This plan does not deprive non-farming heirs of their inheritance because they will receive rental income from the land. Then, the farming heirs can buy out their non-farming siblings as cash flow permits. Also, members of the trust could purchase the shares of other non-farm siblings if someone needed cash.
If your goal is to keep the farm in the family, you have to develop a plan in advance for the children who want to farm. It’s important not to procrastinate and to create the necessary documents to ensure that the plan takes place. Be sure to discuss the general details of the plan with all of the family members involved, so everyone knows your intentions. While it’s important to be fair, it is after all your business and you can determine its future.
Don’t make the mistake of forcing the children to ultimately work out the issue themselves. The stress involved can lead to destruction of the family.
Darrell Dunteman, is an accredited agricultural consultant and accountant with offices in Bushnell, Ill.
For More Information
Want to get more ideas for your estate plan? A good reference source is Farm Business and Estate Planning by Neil Harl. This valuable guide is more than 300 pages long and written in easy-to-understand language. The book is available for $26.95, plus $3.50 shipping and handling per copy. You can purchase it from Ag Executive, 115 East Twyman, Bushnell, IL 61422. (Illinois residents must include an additional $1.68 per copy for sales tax.)