I spend a lot of time working with business succession and estate planning in agriculture. While we often discuss the need to protect the farming heir, as well as being fair when dividing estates, two separate problems I observed last year demonstrate the need to make sure that the needs and concerns of the non-farming members of the family receive attention, too.
Don’t play favorites if you want your family to survive. One case I observed last year concerned a father with three sons. The youngest son returned home to farm, and the other two brothers lived in the area but did not farm. The father had assisted all of the sons over the years and wanted the farming operation to continue. He had been successful and had created an estate worth almost $6 million. However, the non-farming sons only received $1 million of assets each, and the remaining $4 million in assets went to the farming son.
The death of the father resulted in the dissolution of the family. The golden rule does apply: He who has the gold gets to make the rules. However, if a bequest has the possibility of looking unfair, the parents must explain to the non-farming children why it was done this way. In this case, the difference in the amount of the sons’ inheritance was so great that the non-farming brothers could not understand their father’s logic. The non-farming sons appreciated the fact that their younger brother had contributed to the father’s operation, but couldn’t reconcile what they perceived to be a major inequity.
Don’t forget to protect the non-farming heirs, too. Every family wants to see the family business continue after the retirement or death of the parents. We often devise strategies to allow the farming members to control the farming assets. The farming family members need the farming assets to provide their family living, while the non-farming members normally have their own source of income. However, what happens if the farming family member is a poor manager?
In another three-brother case, mother and father made the farming heir their executor as well as the trustee of a family trust. They determined that the best way to protect the farming heir was to give him control of their finances. The farming brother was given more than $100,000 in cash, plus more than 1,000 acres of debt-free farmland to manage. However, within six years, the cash was gone and a portion of the farm had been mortgaged. Was the farming son dishonest? An investigation revealed the farming son was not dishonest, but incapable of managing the operation. The non-farming brothers had to go to court to remove their brother as trustee to save their inheritance.
The parents should have taken steps to protect the non-farming heirs as well as the farming heir. One option would have been to require the farming son to provide a guaranteed minimum return to the non-farming heirs. An agreement I recently saw provided a minimum return of 2 percent per year over a period of time for the non-farming heirs. The agreement allowed for a number of poor production years, but also allowed for the removal of the farming son — and potentially the liquidation of the operation — in the event the farming son could not properly maintain the operation. If the family had enough members, a procedure could be developed to remove the farming operator on agreement of all of the non-farming members.
What about your business succession or estate plan? While it’s important to consider the needs of the farming family member, don’t forget the non-farming family members. Make sure that you take the time to discuss your goals with them, as well as those you wish to continue your family business.
Darrell Dunteman is an agricultural financial consultant and accountant with offices in