Think back to your 2019 grain sales. Did you sell some corn for $3.70 a bushel? Were you happy with that price when corn went up to $4.25 a bushel? What would happen if, after you sold the corn for $3.70, you asked the elevator to pay you $4.25 six months later when you delivered it? They would say, “I’m sorry, but a deal is a deal.”
What if you bought farm land 15 years ago for $2,500 an acre and the seller showed up at your door today and tells you that the land was really worth $8,500 an acre, requesting that you pay the additional $6,000 an acre. You would probably respond, “I’m sorry, but a deal is a deal.”
In the past, many farm estate plans have included options for the farming child to buy the farm ground at “fair market value”. That number is making things difficult now and potentially even more difficult in the future as the parents are doing their best to be “fair” to all their heirs.
A common question I have been asked during the last few years has been how to keep the estate plan flexible to adjust for increases in land prices. Typically, when it comes to farm land distribution, mom and dad will arrive at a set price for the land. That “set price” could be anything from fair market value, to a percentage of fair market value, to a flat number.
The fact that land prices have remained high has some asking “what if land prices went up even more?” Sometimes we overlook that land prices could also go down. Either way, if dad and mom’s estate plan sets a fixed price for the land that allows the farm to be distributed and the non-farming heirs get a fixed number of dollars, is a deal a deal in this situation as well?
Fair market land value is remaining high despite the low grain markets. It’s creating cash flow concerns for the farming operation, and many people are now picking a flat number on which to base their farm estate plan. One could apply many calculations, estimations, and opinions as to what that number should be. However, more and more farmers are using a number at or below today’s fair market value. They fear for their farming heir’s ability to cash flow if the land price is at today’s fair market value or greater. The reality is, if dad, mom, and the farming heir agree on the price, does anything else really matter? Isn’t a deal a deal?
I believe a major issue in agriculture could be the potential for the farming heir to be forced to buyout his non-farming siblings at fair market value within nine months of mom and dad’s death. Ironically, nearly all farms today are a combination of assets that mom or dad inherited plus several purchases of farm land occurring over a 30 to 40 year time period at prices starting at $200 to $500 per acre. Even with the inheritance and some very reasonable land prices, there were difficult times along the way. It often takes until retirement before the farm is ultimately paid for.
Now we are asking the farming heir to purchase the vast majority of mom and dad’s estate all at once at potentially very high land prices. Is that really what mom and dad want? Or should a set price be established on which both parties agree? Then a deal is a deal and what the others suggest shouldn’t really make any difference.
I am often asked what that number should be. I don’t know that there is a “right” answer. Each farming situation has a different debt load and cash flow to work from. I recently had a gentleman give me a set number he desired to go to each non-farming heir. When I asked how he arrived at that number, he gave me a very interesting answer. He said, “Well, that’s what it was worth when they left home.” A thought provoking answer, isn’t it?
So last week during appointments in Iowa, Nebraska, Illinois, and Indiana, whenever the question of what number we should use came up, I gave them that example and got some interesting feedback. There is no question in my mind that most parents want to do everything possible to be fair. Yet, there are limits to affordability with inflated prices.
Now I ask all my clients how much they paid for one of their first pieces of ground. They often tell me a number between $200 – $500 per acre. I then ask if that ground has increased in value since their purchase. They smile and say, “Yes, it’s probably worth $7,000 – $10,000 per acre right now.” “So,” I reply, “if the person that sold you the land showed up at your door today and requested the difference between what you paid for it then and what it’s worth now, what would you say?” Every single client responded definitively with almost word for word predictability. They all say “a deal is a deal”.
So how does that apply to the current farm estate planning? First, farm families clearly need good planning in this environment. Second, regardless of the numbers used, after a plan is implemented, land values will likely go up or down, but everyone involved has to recognize that a deal is a deal.