“What do you want to happen to the farm when you are gone?” When meeting with individuals who own and operate a farming business, there are typically two answers to this question. First, they want to make sure their farm or ranch stays within the family. Second, they want it to go to their children. A common scenario among these individuals is that one of their children wants to continue the farming business while the other children do not. What can farmers do in a situation like this as they plan for the future?
The good news is: There is no shortage of ways to decide how to administer one’s estate. The bad news is that there is no shortage of ways to decide how to administer one’s estate. Because of this, it can make the process seem intimidating. That is why it is important to start exploring those options now so that enough time can be devoted to coming up with a plan that is going to work best for oneself, one’s family and the business. There are many questions that need answering when succession planning, and most of those questions are not revealed until the process has begun and individuals are in the thick of it.
Here is a relatively simple hypothetical, addressing the concern raised above, regarding one child wanting to take over the farming business while the other children do not. This hypothetical will only explore one of the many options available and will hopefully illustrate the different areas that warrant consideration during the process.
Fairness and farm success
Mom and Dad own a small farming operation of 75 acres. They own their house, two vehicles, the farming equipment and the land, with no debt. They have four children. Of these four children, child number 4 has always helped out on the farm and has expressed interest in taking over the farm when Mom and Dad decide to retire or pass away. Children 1, 2 and 3 have no desire to participate in the operation of the farm. Mom and Dad want to ensure that child number 4 ends up with the farming business after they have passed on, but also want to be fair and ensure children 1, 2 and 3 are left with something.
To try and limit resentment among their children and avoid a dispute regarding their testamentary wishes, Mom and Dad decide they want to give the four children an equal one-fourth share in their estate, which includes the farming business. They also want to make sure child 4 can be successful with the farm operation. Next, Mom and Dad need to decide what method they want used to determine the value of their estate, and consequently put a value on what those one-fourth shares will be worth at their time of death. While there are many different types of valuations that can be used, they decide to use the fair market value (FMV), as it is considered a fair and equitable way to determine valuations within an estate. Every asset in the estate will be given an FMV, including what the farm business will be worth if it were to be sold.
Subsequently, Mom and Dad choose to provide an option in their testamentary instrument that allows child 4 to buy out or purchase the other siblings' one-fourth interest in the farming business. This will accomplish Mom and Dad’s goal of treating the children fairly, providing children 1, 2 and 3 a share of the value of the farm business while also ensuring that child 4 ends up with the ability to own and operate the farming business. Next, Mom and Dad want to instruct that child 4 can use its one-fourth interest in the estate’s assets (the house, the cars, the farming equipment and the land) as a credit toward the purchasing of its siblings' shares of the farm business. In other words, child number 4 can subtract its one-fourth interest in the estate overall, from the FMV purchase price of the farming business. Mom and Dad also have the option of dictating how child 4 can finance the purchase, such as executing a promissory note in favor of the siblings, allowing the buyout to occur over months or years, or they can leave it up to child 4’s discretion on how to secure its own financing. Mom and Dad also decide to put a one-year time restraint on when child 4 needs to obtain financing and buy out the other siblings, to ensure the effective distribution of the estate.
Now, this hypothetical is not the gold standard for what an individual should or could do under these circumstances, but merely an illustration of what can be done, and some of the things that need to be considered when making these decisions. Probate laws generally give individuals wide discretion as to what they can do with their estate through a will and how they can structure its distribution.
Succession planning can be a tricky and delicate matter, especially under the type of circumstances described above. Oftentimes it can be an emotionally charged process that strains familial relationships. This is one of the reasons why it is imperative to take the time to come up with a carefully thought-out plan and discuss it with one’s family members before final decisions are made. At the very least, this will prepare them for what is to come and decrease the likelihood of interfamily conflict when the plan is executed in the future. Because of the many options available to individuals creating a succession plan, it is also important to start exploring those options with the guidance of an attorney, accountant or other professional estate planner so that when the time comes, or a crisis arises, these vital decisions are not made hastily. As the old adage goes, “Proper planning prevents poor performance.”
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