Without proper farm succession planning, heirs can be left with few options to preserve the family farm. In the following scenario, an adult son finds himself in the emotionally stressful situation of trying to keep his parents' farm, while also maintaining good relationships with his non-farming siblings.
Larry and Alice Johnson were proud of the life they built, including their four adult children – Benjamin, Peter, Nancy and Deborah – and their 80-acre grain farm they had inherited from Larry's father. After finishing college, Benjamin returned to his parents' farm to help develop new products and has continued to work on the farm while also caring for his parents as they aged. Peter, Nancy and Deborah's lives took different paths, and they all entered non-farming careers in other states.
It had been Larry and Alice's dream that their children would be the third generation of Johnsons to farm the land, so when it came time to write their wills, they left the farm equally to their four children, and stated that “we wish, but do not require, that the land and farm operation be maintained by our children as a working farm.” Like 75% of farm owners in the U.S., Larry and Alice did no other farm succession planning and simply assumed that their children would follow their wishes and work things out amicably.
When Larry and Alice passed away, their farm assets were as follows:
|Land (if used for farming)||$500,000|
|Inventory, Equipment & Supplies||$800,000|
Each child's 25% share of the farm is approximately $450,000. Benjamin wants to stay on the land and continue to operate the family farm but the other three siblings have no interest in farming and would prefer to cash out.
Complicating matters further is the fact that the area around the farmland has recently been developed and a local developer has expressed interest in purchasing the family's farmland for $2.5 million. If they sold the land to the developer, the value of the assets would change:
|Land (if developed)||$2,500,000|
|Buildings (to be torn down)||$0|
|Inventory, Equipment & Supplies (value if sold at auction)||$400,000|
Selling the land to the developer would increase each sibling's inheritance to $725,000. Peter, Nancy and Deborah would prefer to maximize their inheritance by selling to the developer; Benjamin has a strong emotional attachment to the farm and would prefer to honor his parents' wishes by continuing to operate the farm.
Unfortunately, in the absence of a well-crafted farm succession plan, the siblings find themselves without many options that will preserve the siblings' relationships with each other and also allow the family farm to continue to operate.
|Without farm succession planning, Benjamin may be unable to keep his parents' farm|
|Honors Larry & Alice's wishes||Allows Benjamin to continue farming||Gives Peter, Nancy & Deborah immediate cash out|
|Benjamin continues farming, pays siblings rent||Yes||Yes||No|
|Benjamin purchases his siblings' shares of farm and continues farming||Yes||Yes||Probably not, if unable to obtain financing or unable to agree on purchase price|
|The land is partitioned, the three non-farming siblings sell to a developer, and Benjamin retains 25% of the farm||No||Probably not||Probably not, if the developer is unwilling to purchase a partial share of the land|
|Benjamin disclaims interest in other estate assets and takes sole title to farm||Yes||Yes||Probably not, if other assets are insufficient|
Option #1 – Rent
One of the simplest options, and the one that Benjamin is most likely to want, is for each sibling to retain their 25% ownership in the farm operation and land, allowing Benjamin to operate the farm while paying rent to each of his siblings. This option does not accommodate the non-farming siblings' desire to cash out and collect their inheritance, so they are not likely to agree to it.
Option #2 – Sale to Benjamin
The three non-farming siblings may be willing to sell their shares to Benjamin to enable him to continue the farming operation. However, financing such a purchase could be an obstacle for Benjamin, unless his siblings are willing to hold promissory notes for the purchase price. Since Peter, Nancy and Deborah just want to cash out, it is unlikely they would be interested in this option as it would necessitate a lengthy and risky delay in receiving their proceeds. Negotiating the appropriate purchase price may prove to be another sticking point if Peter, Nancy and Deborah insist that they should receive the same price they would have received had the farm been sold to the developer.
Option #3 – Partition
A partition would result in each sibling owning a separate 25% parcel of the land which they would then be free to dispose of, or live on as they see fit. The obvious problem with this is that the farm buildings and operations are spread out over the entire property and there would be no way for Benjamin to consolidate everything onto his 25% parcel. The developer may not be interested in purchasing only 75% of the land, particularly if their planned development will now directly abut Benjamin's working farm.
Option #4 – Disclaimer
If there are other valuable assets in Larry and Alice's estate that were also left in equal shares to the four children, the children could do some post-mortem estate planning by redistributing the ownership of the various assets. For example, if there is a $1 million life insurance policy and a $2 million retirement account, with each sibling to receive $750,000, Benjamin could renounce (or “disclaim”) his share of the life insurance and retirement account, which would result in the other three siblings receiving an additional $250,000 each. In exchange, each sibling would disclaim a portion of the farm property in favor of Benjamin. Unfortunately, this will not be an option unless Larry and Alice owned other assets of sufficient value to compensate the non-farming siblings for the value of their shares in the farm. For most farm owners, their farm is their largest asset so this type of post-mortem asset swap would be impossible in most situations.
The unfortunate reality for Benjamin is that, no matter how amicable his relationship with his siblings may be, if he is unable to persuade them to allow him to remain on the farm and to forego an immediate cash out, it is likely that the farm will have to be sold.
If you own a farm, consult with an estate planning attorney experienced with farm succession planning. There are many options to help preserve and protect your family farm for future generations. Although farm succession planning can be a complex process, it is the only way to ensure the future of your family farm.