Dear Michael: We have quite a bit of land, machinery, but we’ve also been able to stockpile some savings and quite a bit of grain on hand or on contracts that has grown to a good amount over the past few years. We have one child who farms and three other children not involved in farming. Right now we have enough that we feel all of the children…
|Dear Michael: We have quite a bit of land, machinery, but we’ve also been able to stockpile some savings and quite a bit of grain on hand or on contracts that has grown to a good amount over the past few years. We have one child who farms and three other children not involved in farming. Right now we have enough that we feel all of the children should be treated equitably, if not equally, by splitting up our property – both land and liquid assets – between all four of our children. Our farming son will receive enough of our liquid assets that he should be able to buy out his non-farming siblings when we die. Are we looking at this the right way? – Pondering.
Dear Pondering: It’s good that you took the time to stop and think about this as very few people do. Most people make a visit to their local attorney, tell him or her how much they have and many people stop at ‘our farming son will have more than we had to go on when we got started in farming’ mentality, end up signing a will that splits everything equally – land and liquid assets.
On paper, it would appear your farm son would have sufficient assets to buy out the other children. But if it doesn’t state in your will two important things, his chances of ever getting the original farm back together again are nearly nil.
I always refer to splitting land as well as liquid assets between the children (farm and non-farm) as ‘arming the natives’. Now, each side has property – deeded in their name – and, now, enough money to pay someone to fight over the land.
You still see your four kids, in this regard, as the kids who sat in the back of the station wagon and you were able to control them with a good, long look. After your death, they will themselves as four totally different individuals, with totally different families, heading in four different directions. Not good partners to have in land. Being family almost makes it worse than being total strangers.
I always ask the farming child ‘If you received liquid assets from your parents estate what would you do with it?’ His reply, invariably, is to buy out the non-farming heirs. But now you’ve set up a situation where the farming child has to negotiate with the non-farming heirs and getting four children, and their families to agree on how this will happen rarely occurs. Why start there to begin with? It doesn’t make common sense.
One, it has to be stated in your will, trust, or life estate deed, the farming child has the right to buy the property from the other children at some point after your death(s).
Many people balk at this because it’s taking the right away from the non-farming children if they want to sell or not. That’s true – and that’s really the point of doing it.
If you don’t force your non-farming children to sell the land, they’ve just inherited one of the best returning assets in the U.S. for the past decade. Why would they ever sell it if they can basically name their rent to your son – and if he won’t pay it, someone else will? If your children get an eight to ten percent return on land versus maybe one to three percent in a shaky stock market or in CD’s, they’re never going to sell the land.
Two, you have to spell out the conditions under which your farming son can buy the land. These conditions will include how the land will be valued (FMV, appraised, county average), how soon the farming son has to act in order to buy the land (six months, one year from date of death What kind of terms and conditions does he have to pay (cash up front, contract for deed)?
Last, but not least, we also need to put a ‘tail’ on the farming son. If he has a vegetable garden, is he considered ‘actively farming’? If he does get a ‘break’ on buying the land, we put conditions on him about ‘active farm participation’ if he should decide to sell or rent out the land in the future. If he doesn’t meet your conditions of what you would consider ‘active participation’ in farming for a period of time following your death(s) guess what? He’s going to have to pay a lot of money to his non-farming siblings to equal out what he got versus what they received from your estate.
When you look at the mathematics of a farm estate, it’s always better to line up your assets in two ways – farming assets (assets necessary for the farm operation) and non-farm assets.
When the estate is split between non-farming and farming heirs, rather than ‘arming the natives’ with both land and cash, the non-farm children receive, in your case, one-third of all the liquid assets. The farm child receives a commensurate amount of farmland, giving him a boost of what he needs most to run his business – and lowers the amount of these types of assets going to his siblings.
Next issue we’ll talk about what are ‘liquid’ assets when it comes to discussing grains held, livestock, grain contracts, pre-paid expenses, etc. Are these liquid assets or are they ‘necessary’ to the farm operation? Keep reading and keep on Keeping the Family Farm in the Family!