Things to Consider Before Picking Heirs to the Family Farm
There are many concerns that farm families worry about, and it’s usually the same ones that pop up over and over, from family to family. If you’re worried about these obstacles, you are not alone. Which one of these sounds familiar?
Fair and equal treatment to heirs — How can we make our legacy positive and fair to all of our kids rather than a burden? For example, let’s say one child farms and three do not. How do we make sure that child can be successful while still being fair to our other children?
Senior Care and other financial burdens — How do we balance the farm with the expenses we know are coming and possibly some we may not anticipate?
Deciding who should take the lead in succession planning — Who is making the decisions?
Logistics — Now that we know what we want, how do we make it happen?
Several years ago I had a family contact me and they told me they wanted to work on a plan to pass the farm to the next generation. They had a son and a daughter. The son helps with the farm, and the daughter does not — she’s single without kids. My first question to the family is always how did they get the farm?
How a family inherits the farm is the most important starting point when you begin thinking about and discussing farm succession planning. It sets the conversation up in the right framework. When we understand where the farm came from, we can understand what’s important to us. Is it a farm that has been passed down for generations? Are we the first-generation owners or the 5th? What generational ties are knotted into the decision we are discussing?
This family continued to tell me about the farm, and explain how they came into running the farm themselves. The husband told me there were four siblings — three sisters and himself. He had always worked the farm with his dad, and it was a part of his upbringing and much of his young adulthood as well. The farm was ingrained in him. But, when Mom and Dad passed away, they had done zero planning for passing the farm down to him and his siblings. After they passed, he sat down with his sisters and asked them what they needed from him in order to feel like the succession was fair. They gave him an answer that not many people are as lucky to get.
“Give us each a dollar and we’ll call it fair,” his sisters told him.
“Is this how it is going to happen for you and your children?” I asked.
“Absolutely not,” the husband.
He’s right. There is no way that will happen nowadays. Farming has become a big business, the land is worth a ton of money, and everyone has Google to look it up. In other words, the details behind how you inherited your farm aren’t likely to be the way you pass it on to your heirs. It simply helps you paint a picture of what once was, and weigh the options through a more cohesive lens that distinguishes what’s important to you.
Alternatively, what do you do if none of your kids want the farm? —
Do you sell it?
Do you rent it?
How about charitable giving?
Do you have someone else that can step up and run the farm?
With the understanding that it isn’t as simple as it may have been for previous generations, how can we make all of this fair to our heirs?
Next, we must consider retirement and senior care along with other financial challenges. This is overlooked far too often. I once had a couple come to me where the man’s mother and stepfather had sold the farm to pay for their care. Mom was in memory care, Step Dad was in a seniors’ home. They were blowing through their assets because of how expensive these senior homes were. By this point, there unfortunately was little I could do to help.
I’m telling you this to emphasize the importance of planning early. When you plan early, you don’t have to lose the farm to creditors, nor do you have to sell the farm to pay for elder care. Beyond succession planning, you also have to consider estate taxes and the amount of planning that goes into that in addition to succession planning. These things are a big deal. They could turn everything you’ve worked so hard for all these years upside down, leaving your heirs to pick up the pieces.
So, how can we avoid losing the farm to creditors? How can we avoid selling the farm to pay for a nursing home? What happens if there is a divorce? Here are a couple of examples of situations I’ve seen where there was not a plan in place, nor a clear-cut decision maker leading the pack in these estate planning conversations.
There once was a grandmother who lived in a senior home. She had grown up on the farm, ran the farm, and now, watched the farm from afar while the next generation took over. Although she wasn’t actually there, she ran the finances while her son and grandson ran the farm. Imagine the lack of clarity in decision-making. Imagine the potential conflicts that could arise out of that dynamic if the person in charge of finances doesn’t know what is going on with the everyday operation of the farm. There is a big disconnect there, and disconnects leave ambiguity. Ambiguity leads to friction, and friction leads to conflict.
Then I had another situation where I was talking with a couple and the husband passed away before they had a set plan in place. The children did not have the skill set to run the farm, so the mother was not only dealing with losing the love of her life, she now had to figure out what to do with the farm. What if she and her husband are the generation that ends this farm? Is that what her husband would have wanted? Again, that ambiguity of options without specific, set plans in place led to friction. The decision of succession sat heavily on top of her grief. These are examples of what can happen if you don’t have clear decision-makers, if you wait too long, and if keep putting it off thinking you’ll figure it out eventually.
Now, let’s talk about logistics. The first thing to figure out is to clearly define your goals. Let’s not think about what the neighbor did or what you read on the internet. Throw that in the garbage. What do you want? This is the true starting point. Once you have a goal set in place of what the best-case scenario would entail, we can work backward to get there.
When you’re considering your goal, try to make it something straightforward. Something like, “I want to make sure my son can continue to farm,” or “I want my family to cash out.” This way, both you and your advisor will know exactly what your end goal is. From there, everything else we talk about is in consideration of how we make that said goal happen. This is up to the decision-makers. We can bring the kids and whoever else in later, but we need to start with just the decision makers clearly defining their goals and aspirations for their family’s future.
While discussing logistics, we’ll also work on capacity. Can we make the goals happen, are they achievable?
“My son is farming with my husband. He’s a good kid and I love his family, but I just don’t think he can do it once we’re gone,” is a sentence I’ve heard multiple times.
I had a woman call me and tell me she didn’t think it would work because she didn’t like the way her son and his family handled the farm. There have been situations where people don’t trust their heirs to keep it going, and they know they would be better off cashing out or hiring help. There have been other situations where the family has all their kids working on the farm and they love it, they work hard, and they will carry on the family legacy without hesitation. Every family sits on that spectrum of capacity, and it’s usually the decision-makers who know the reality of their position.
Here’s the thing: Every generation is going to do things differently. Do you think he can’t take over because he doesn’t do it the way you and your husband do? Or is he truly incapable of doing it well?