Farm Succession Planning: Dealing With the Hard Fact That Equal Division Might Destroy the Farm
Farm families need real-life solutions when it comes to passing the farm to the next generation. When I work with a family once they get clear on their goals I can most often provide numerous solutions. The hard fact is that if our goal is to keep the farm operating and pass it on to the next generation to continue to have it a profitable operating farm we most often cannot split it into pieces.
These facts might hold true for your farm:
There are years when two families can be supported on the farm (Mom and Dad and the heir (s) that have come home to farm) but there are years when it is tight.
If we want to continue to exist we must continue to grow and we cannot bleed revenue to another source outside the farm if we want to stay in business.
One child or more might have given up the traditional job with a 401k or other life building/retirement sustaining perks to farm and keep the operation going.
Your generation worked hard to eliminate debt on all or most of the land and to put the burden of a loan back on the current land would be a step backwards in risk, independent from the bank and overall financial stability.
You raised all of your children well and tried to instill good moral and financial values. Some received college degrees and left the nest. They are making their mark on the world in great ways and it is not on the farm. Some might have been raised well and they are struggling. You might be one of the lucky ones that have an offspring who has the commitment to the farm that you have and the generation before you had.
You love all of your children the same no matter what the path and you want the farm to continue and you want your children to feel loved.
We can’t always divide the assets equally and maintain a functional farm. We also don’t necessarily need to. What is fair and what is equal do not always align. Here’s what I mean.
Let’s look at this hypothetical example –
Mom and Dad own a farm, and they’re nearing retirement age. This does not mean they are ready to retire.
Their son, Brad, lives on the farm with his family. Mom and Dad are thrilled to have him there. Over the past several years, Brad has not only worked the farm as he always has, but is now taking on more and more responsibility. He’s been doing a great job and Dad is gradually lightening his own workload and responsibilities while continuing to mentor Brad where needed.
Because of this, Mom can finally get Dad to take time off so they can spend more time together going on vacations and enjoying life. Before Brad stepped up to the plate, they had to schedule carefully since they ran the farm full-time. On top of that, Brad now has children. His taking on more responsibility at the farm means that Mom and Dad are able to spend more quality time enjoying their grandkids.
It’s obvious in this decision that Mom and Dad know Brad is the key to keeping the farm going. They know he not only wants the farm, but he has earned it. They know he will take great care of it. Plus, this way he can pass it to his kids, which would make a fifth generation to own and run this farm. They are proud of the family legacy and want to make sure it stays in good hands.
Now, let’s talk about Holly, their daughter. Mom and Dad love and respect her dearly, just as much as Brad. She is an incredible teacher and a great daughter, but she’s married to a man Mom and Dad do not have a great deal of trust in. He doesn’t work much, and they know he would be no help running the family farm. Sure, he’d probably be interested in the money, but not the work required to run the farm.
Then, there was Greg, their second son. Mom and Dad love and respect him dearly, just as much as Brad and Holly. Greg works in IT, which is a great job that he truly enjoys. Neither Greg nor Holly have much interest in living on or running the farm; They are happy with the lives they already have and enjoy what they do.
Aside from the farm, Mom and Dad have other assets.
They have about $100K in one retirement account from a job Mom had years ago. Mom and Dad have been hands-off with this account and the money has continued to grow. They also have about $100K in a Certificate of Deposit (CD) account, as well as another $200K sitting in the bank. So, they have around $400K saved in total in addition to the value of the farm.
Life is great! In fact, things have been so great that Mom and Dad have been a bit lackadaisical about their succession plan because, on the surface, it seems like there won’t be any issues. They have their assets, the farm is going great. The kids all get along well and are happy with the way things are.
Though Mom and Dad haven’t thought much about it up until now, they are finally starting to realize that in order to make sure the kids keep getting along and don’t have a reason for conflict, it’s time to iron out the details and formalize the plan. Ultimately, they know they want Brad to keep the farm. They also know they have no way to make things equal for Holly and Greg if this happens, but they want to ensure whatever they do does not leave one or more children feeling left out or not loved.
The challenge here is that there is no way to split this farm three ways.
Mom and Dad can split the money to where Greg and Holly get $200K each, but then Brad comes out too far ahead financially by getting the farm. On the other hand, if they find a way to split the money evenly, it’s not fair to Brad because he has more sweat equity in the farm. And splitting the farm three ways will sink it and destroy it over the next several years and this is not inline with the goals of the decision makers- Mom and Dad. The thought of ending the farm over distribution between heirs is sickening. Also, unlike Holly and Greg, Brad doesn’t have a traditional retirement plan, like a 401(k), since his lifetime job has been working the farm. These are all considerations in how they pass the farm and the assets down.
So, what can we do in a situation like this?
A bucket of funds needs to be created to be passed to the non-farming children when the decision makers pass away and pass the farm to the heir who has been farming. The sooner a family takes action to make this happen the more leverage that can occur based on age and time. It is much easier in our 50’s but not impossible in our 70’s. When steps can be taken to make this happen it feels like magic. A good financial advisor can help a family sort through solutions and see if this is a possibility for your specific situation.
Know that this isn’t the only solution, though, so if you don’t think it will work for your situation, we’ll discuss other ideas and get creative where needed. No matter what you do or how you formulate your succession plan, the key to everything is to take decisive action based on good advice.
If you need help getting started or have questions of what the best option is for your family, please reach out to me at 605-878-0344 or email me at email@example.com. I am here to get you on the right track and am always happy to be an informal sounding board as you consider what the future holds for your family.