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?”
The problem, Voss says, is sentimental attachment.
“It was their home. They saw mom and dad work it, and most of the time they didn’t see their sibling work it. He was going to high school and then college,” Voss says. “When he came back, they never really saw him working. They were all gone.”
Think it through
As you work toward a plan for asset distribution, think through the potential ramifications of your actions.
“If we have $10 million of assets and $5 million in debt, we have $5 million in equity leftover,” Voss says. “The son taking over the farm has all that debt to deal with… If he’s one of four children, the next thing you know, he’s got to deal with threefourths of the equity. So the non-farm equity becomes his farm debt.”
Your plan for distributing the business assets also can put heirs into business with each other when they had no intention of doing so. This can backfire on more than one level.
“My experience as an attorney tells me that death brings out the best and worst in families, and usually it’s within about half a second of one another,” Baker says.
Plus, your unintentional business partner’s knowledge of modern dairy farming practices can be severely limited.
“I tell people that I grew up on an acreage,” Baker says. “My father got rid of the cattle back in the early 1950s. I don’t know anything about that business anymore. It would not be a good business decision to put someone in business with me, and yet that’s what we see happen.”
Do it now
Taking the time to put together a comprehensive asset distribution plan will not only move the business forward, but equitably compensate both on-farm and off-farm parties.
“There are lots of tools that can be used very effectively by farm business owners to put together a comprehensive business succession plan that helps to keep the business assets together and also provides a form of compensation for the in-business heirs and the non-business heirs, without destroying the business,” Baker says.
“If you don’t sit down and do some business succession planning, there’s a good chance that your family will no longer have a farm business. And, there’s a good chance that the farm business will no longer have a family.”
A list of resources to help you make wise distribution decisions can be found at dairyherd.com To access it, type “Tools for business succession planning” into the “Search” box.
What are my options? “There are two different ways to pass down your assets. You can divide them equally among all children, whether or not they are involved in the farming business, or you can look at what’s fair,” says Elizabeth Rumley, staff attorney with The National Agricultural Law Center at the University of Arkansas.
“A lot of people say, ‘We’re just going to divide it. I have three children. They each get a third of my property upon my death.’”
Yes, that is equal, Rumley says, “but it’s probably not going to be able to maintain itself as a business moving forward.”
Here are some alternatives:
• LIFE INSURANCE. The proceeds from your policy would go to the off-farm heirs and the assets from the operation of the farm stay with the child that’s working on the farm.
• GIVE CASH OR OTHER LIQUID ASSETS.
• FORM A FAMILY CORPORATION. This option gives each heir shares in the corporation so everyone receives some proceeds from the farm. If you choose this approach, consider giving the farming child what’s called the ‘right of first refusal,’ which gives that person the right to buy the other children’s shares before they sell them to anyone else. “It keeps the farm in the family and the assets in the family,” Rumley says.
• PUT IT INTO A TRUST. For more information, type “Advice on putting assets into a trust” into the “Search” box at dairyherd.com