We have perhaps an unusual situation. We’ve been ranching since we were close to being in our teens. We had children, raised them and just by timing they came of age during the late eighties and early nineties when interest rates were high, crop prices were low, and farms were dropping like flies. Somehow, we managed to keep the place together through those tough times but none of our children were encouraged to stick around. Since then, even though it hasn’t been a lot of money, we’ve been able to grow our operation.
Our son, who we basically sent away even though he wanted to farm, is now coming up on retirement age in his job and he still has been involved when he had time. When he came to help us, he brought his son with him. Now his son, who’s now in his late twenties, thinks he might like to take a shot at ranching. Even though our son is now in his fifties, we’d still like to make a way for him and/or his son to take over the operation.
Is this possible and how do we need to plan? We have two other children who are not involved.
Dear Three Generations:
As our population keeps increasing in age, I am seeing more and more of this type of situation. Some people have children who have worked their whole lives to someday take over the farm and they reach retirement and their parents are still alive. I call this the “lost generation” – an age group that is caught in between getting the ranch from their parents and having to pass it to their children almost immediately – if they want their children to ranch.
In your situation, I have seen other plans where the son and the grandson are treated as one entity. If you should die and your son or grandson is ranching, then they have the advantages of buying the land at a lesser rate, receiving a larger share of the land – all the things you would do to make sure the farm can survive.
The biggest thing is the increased scrutiny by the other heirs. You can explain to them that you want this farm to continue, to stay together and this is the reason you are giving your son or grandson these advantages.
The value of farmland only has true market value if the farmland is sold. Otherwise, it’s a labor-intensive asset that produces income if everything goes good.
In the back of the minds of the non-farming heirs, however, there’s always that “what if?” What if they quit ranching and sell the moment you die? What if they don’t actively participate in farming/ranching and just rent it out?
That’s why we put a clause either in the will or in a life estate deed to your son and/or your grandson with certain conditions such as:
- They shall continue to farm for at least ten to fifteen years past your death. The less time they have invested now, the more time we put on the restriction.
- They must meet the state corporate farming laws for the definition of farming/ranching in the description of active farming but not extending to the relatives in the corporate farming law. In other words, your son or grandson must meet the definition of farming in the law. However, this is exclusive to them ñ no relatives as it is in the law.
If they should fail at either of these within the time period, the other heirs have the right to either get an appraisal and expect a one-third share of the value at the time of death or now. If they sell, then the proceeds shall be divided into thirds with each heir receiving a share.
This will be an encumbered deed so it may be difficult for your son or grandson to use this land for lending purposes. The best alternative is for your son and/or grandson to work out a plan to either buy it from you before you die or have enough life insurance to pay an equitable distribution to the other heirs if you don’t live long enough to have them buy it from you.