As I drive from appointment to appointment today, I look out the window and see all kinds of different farms. I see older, but well maintained farms. I see old, abandoned farm sites. I also see new houses and sheds. Some equipment is inside, some is outside. As different as the farms sites are, so are the people who occupy the houses.
I usually lead people to do a series of questions, and they respond. Their responses help me formulate ideas. Usually somewhere along the way, there is a question such as, “What do you think? Is that fair?” or, “What do other people do?” Well, try out this sampling for what other people do.
Family #1 – They believe everything has to be equal. It wouldn’t be fair if it wasn’t equal. They say, “I understand my son is farming, but I just don’t know how you can give him more than the others. When we die he will have to figure it out with his siblings.”
Family #2 – They believe in equal with a twist. “I just think you have to give everybody an equal share of land. That’s the only way it’s fair, but they have to rent the farm ground back to my son, so that he can keep farming. They also have to give him a good deal on the rent, because I want him to be able to make it.”
Family #3 – They believe in giving an option without a break. They say,“I think that the only way to keep the farm together is to give our son who farms an option to continue it. He’s helped us build up this farm the whole time and has been working out here for the last 25 years. Plus, our grandson is also interested in farming. When we die, we’re going to give our son the option to buy out his siblings for fair market value, whatever that is at the time.”
Family #4 – They desire to keep the farm together and will give someone a break to do it. They say, “We don’t want all our kids to own it. That would be a mess. It all has to go to one person, but there is no way that our farming heir could afford to buy everybody out at these prices. There has to be a discount of at least 30% or they won’t be able to afford buying out the non-farming heirs.”
Family #5 – They believe that fair is setting a price now so people can plan. They say, “We want our son to farm and we just want our non-farming heirs to have some cash. Based on what we think, we want each of our non-farming heirs to get $500,000 and our son can have the farm. We think you have to set the price.”
I have heard all of these and more. Guess what? They all think they’re being fair. If I told the family #1 that was giving everybody ownership in the family that family #5 was giving all the land to one child and setting a price of cash for the other children, they would say, “We could never do that.” Then if I turned around and told family #4 what family #3 is doing they would say. They would say, “that is not fair to the farming heir. Of course, Family #5 would look at family #2 and say “why don’t you just throw in some handcuff’s too!”
Distributing farm land has always presented challenges. The volatility in agriculture right now is frightening. Fortunately in most, but certainly not all, sectors of agriculture the profitability has rewarded the risk. I recall working with a farmer who had four children. One of them was farming. He indicated he clearly wanted his son to continue the farming operation. His plan to do that was to give his son the option to buy his farm ground from the other three children at fair market value. While discussing other issues, he shook his head about those paying $500 per acre for rent and suggested that some day that wouldn’t work. In fact he went on to say “those guys are crazy”. The good news with rent is that if some day it doesn’t work, they can at least walk away.
We then returned to calculate what his son’s payment would be if he had to buy out his three siblings all at once at fair market value when dad passed away, like his current plan said. The payment would be over $500 per acre for 20 years after dad’s death and the son can’t even deduct all of the payments since they would include principle and interest! Hmm, who is crazy now? The issue was clear.
At that moment he saw it in color and said “we gotta change something, we were trying be equal, but that is not fair to our son.”
Fair is very challenging to accomplish, and there’s not a formula to do it. Knowledgeable advisors can both identify the issues and determine strategies to help your family accomplish your goals.