Ponder this scenario:
You have four children. One of them wants to come back to the dairy farm. The other three work off-farm.
“We can afford to pay you $1,000 per week,” you say to the farming child. “But you know, we always said we wanted to treat you kids equally, so we’re going to pay each of you $250 per week. That way you’ll all be treated equally.” Is that fair? No, it’s certainly not. Most people would agree that the child who works for the business should receive the full $1,000.
“If that’s fair during life, what changes at death?” asks John Baker, an attorney and administrator of the Beginning Farmer Center, part of Iowa State University Extension.
“There’s this presumption that if we divide things equally, in some way that makes it fair,” Baker says. “I don’t know where that idea came from because ‘fair’ and ‘equal’ are not the same thing.”
Distribution of the business assets can be an equitable arrangement for both on-farm and off-farm heirs. Here are some considerations to keep in mind during the planning process.
Assets, not heirlooms
“Farmers tend to look at farm business assets as though they are family heirlooms. They don’t consider them to be business assets,” Baker says.
Consider the situation where you have a set of plates that great-grandma brought from the old country. There are only four left and you have four children. Naturally, you’d want each one of them to have part of the family legacy.
“I think that’s a wonderful thing to do. It passes on the family history,” Baker says. “It’s not a very good business transition model, though, because you’re fractionating the ownership of the business assets.”
It’s wise for not only you, but also your heirs, to leave their sentimental attachment at the door of the planning process.
Elwyn Voss, financial services representative with The Voss Group in Norwich, N.Y., asks his clients to think about this situation: Say you have a son or daughter who left the farm 20 or 25 years ago. If that child dies, what is the brother or sister on the farm going to get out of that estate?
“The answer is zero,” Voss says. “If your brother or sister leaves the business and goes off and is very successful in whatever they do, they don’t think, ‘Gee, my brother or sister back on the farm ought to get something out of this.’ So why do we have this problem with the farm?”