Dear Michael: We set up our estate plan a few years ago and our son, who is farming, was to receive the land, and our daughters were to receive five hundred thousand dollars in life insurance and our savings – CD's, retirement funds, etc. -whatever was left at the time of our death. Our son is to receive close to two thousand acres of which about seventy-five percent of it is farmable. This was about ten years ago and the farmland value and the five hundred thousand to our two daughters seemed like an equitable settlement. Of course, at the time, farming wasn't very good, we had droughts, and we had poor prices, so life was a bit simpler now. But when we see our son buying seven to eight hundred thousand in equipment and putting up a shop for close to four hundred thousand, we wonder how to explain that to our two daughters who come home to visit. Are we still being fair to the non-farming heirs? – Feeling Uneasy
Dear Feeling Uneasy: For as long as I have been in this business – going on thirty-four years in May – I've always been a champion for making certain the farming heir received enough in assets to continue the farming operation.
Like you, Mom, it's getting tougher and tougher for me to look your other children in the face and say 'You're getting an equitable share of Mom and Dad's estate' when Jr. keeps buying assets over the past three years worth more than their entire inheritance.
It wasn't a problem back in 2000, when we had the Freedom to Farm Bill (or as I like to call it, the Freedom to Fail Farm Bill) and we had drought, we had low prices, high costs and farming children we're struggling mightily to make it.
But, in the past five years or so, due to whatever forces at work, it's a little tough to tell non-farming children their brother Jr. is having a tough time making it as he parks his new million dollar line of machinery in a new half million dollar heated shop. Also not helping were the reports by newspapers and media showing the average median income for farmers was in the neighborhood (after expenses) of $179,000 for 2011.
Simply put, the forces at work in 2000 forcing agricultural producers out of farming are simply not there any longer. Income and assets have increased two or three-fold in the past five years alone. Young producers are not helping my case any by spending hundreds of thousands of dollars (not borrowing – spending) on new assets – machinery, buildings, land, etc. and yet, doing the 'I'm broke and can't afford to pay more for the land.'
Like any industry, values can rise and fall, incomes can rise and fall, and these have been good times for farmers and ranchers. And, of course, everyone wants to tell me how bad things can get again and how broke they can be in the next few years if the markets change.
The difference is this, however. Unlike other industries, farmers and ranchers have been adding real value to their bottom line – real value in real estate, buildings and equipment – not to mention they have some pent-up value in crops held, or payments deferred. They've also built real value by paying down debt. Farm debt is at an all-time low – all-time!
Unlike other industries, if farming went bad (wheat goes to $1.80 a bushel, interest rates went to 18% to 21%, we embargo grain to Russia and China – none of which I see in the near future) today's farmers could go for five to seven years before they would have to replace equipment (everything's new), many have two to three years of income before they would have to start borrowing, and their total net worth wouldn't decrease by more than five to ten percent. It didn't happen the last time these factors occurred.
Are you being fair to your non-farming daughters, who have to split five hundred thousand dollars, while sixteen hundred acres goes to your farming child – valued at fifteen to two thousand dollars per acre (or two and a half to three million dollars total value) while your son pays for one to one and half million dollars in machinery and buildings out of income? No.
Jr. has to wake up and realize just how much he is truly getting from your estate and, yes, he did help build this equity – but not to the point where he gets ten, fifteen or twenty times the amount your non-farming children should receive. Instead of buying the next latest, greatest piece of equipment, maybe Jr. should invest a little money on a million or million and a half dollar insurance policy on Mom and Dad to provide equity to the family. Premiums could be in the tens of thousands, but in comparison to other farm costs rising, it's a drop in the bucket to keep everyone satisfied. Perhaps it wouldn't hurt him either to have to pay out a little for this multi-million dollar inheritance. One takes better care of stuff when you've paid for it!
As farm assets have grown, so too should have the amount going to non-farming heirs.
When farming heirs suffered, a lot of the non-farm heirs understood and helped the farming sibling succeed.
Now that the shoe's on the other foot, I think it's time the farming heirs recognize their success and treat the non-farming heirs to a little more equitable settlement – not one dated back ten years ago. The farm heir's value has grown by real dollars – but the amount going to the non-farming heirs is stuck in time back in the '90's.
It's no longer fair and it's no longer equitable to the other children. If farm heirs want anyone to feel sorry for them, perhaps either quit spending all the money spent lately – or take a small percentage of that income and use it to ante up with their siblings by buying a little more insurance on Ma and Pa. Fair is fair!