Farms have grown to the point where they are no longer ‘Mom and Pop’ businesses. They need to put on their big boy pants and have signed business agreements with all owners and future owners of the assets.
We don’t have a will, and our farm operation has grown in value, if not income. We don’t know where to start. It seems we’ve heard too many stories about wills not followed by the heirs afterward.
We are wondering if there is anything else we can use, like an LLP or LLC or corporation so that we know how things will work out?
– Looking for Guarantees
Dear Looking for Guarantees:
Like you, I’ve seen many cases where the heirs don’t follow the terms of the will once the parents are gone. Once the property transfers to the individual heirs, any conditions you may have put on the ownership of those assets tend to fade over time.
Why? Because wills are not binding contracts. They are your wishes of the disposition of your property upon your death. These wishes are followed immediately upon the second death of the parents, but then things can get a little cloudy afterward.
For example, if I give land to one of my non-farming children via my will and tell them they have to rent or sell to my farming child at some point in the future after my death, how long is this good for? If the non-farming child puts their spouse onto the deed, as all good spouses want to do when they’ve negated the conditions you set upon the land to rent or sell. As soon as the spouse’s name is on the deed, they have legal rights as well of ownership.
They are not bound by the conditions of your will, and they can do what they like with ‘their half’ of the ownership of the land.
Too often, parents put good intentions into wills only to have the heirs find ways to change or ignore the instructions. After all, they own it now, and they didn’t agree to these terms in writing.
As such, most of my planning is going into family partnership agreements. These are agreements you find as a part of an LLC, LLP or corporation which all the co-owners sign.
We sit down with the families now. First of all, with Dad and Mom to determine how they’d like to see things go in the future. Once we have that established, we bring in the children to have them discuss the future ownership of these assets and how they will handle the ownership in regards to them owning it. Issues such as what the farming child’s rights are (rent or buy), terms of such a buy and events that might trigger the purchase by the farming child.
In some cases, the parents give the child farming the right to rent and buy the assets from non-farming siblings. In other cases, the parents allow the non-farming sibling to determine if they want to sell or if they prefer to receive rent upon the property. Upon the death of the non-farming sibling, we may give the farmer the option to buy – if they have farming children – so the farm unit stays together. Or we might put the same conditions on the heirs of the non-farming sibling of rental rates or buy options.
Once everyone agrees to all the terms of the family ownership agreement, everyone should get a copy of the signed document.
What is the difference between this and a will? You now have a bilateral contract signed by all parties with a written agreement directing how they will deal with the ownership of this property. This signature guarantees that the terms will be followed, and nobody can claim they were not aware of the terms of ownership.
Farms have grown to the point where they are no longer ‘Mom and Pop’ businesses. They need to put on their big boy pants and have signed business agreements with all owners and future owners of the assets. This is something every major business has in place – cloaked in an LLC, LLP or corporation. You can skip the extra headache of creating the separate entity, and just do your family ownership agreement.