Protect the heirs who want to farm

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I spend a great deal of my time working with farm families, helping them plan for the future. My role is to educate the family members on the options and potential problems that their businesses might face.

Often, I consult with them on passing the farm from one generation to the next. Most parents agree that the business should be divided differently between farming and non-farming heirs. Children involved in the farming enterprise have made a commitment to the business — it's their source of income and their future. The other children are entitled to a share of the business after the departure of their parents... but they have their own sources of income.

Unfortunately, many parents do very little planning to protect the farming children. Often, they will include the following language in wills and trusts: “I will allow the farming heirs to buy out their brothers and sisters at fair market value.” Some plans specify an interest rate, terms or provide a discount from fair market value.

While this language seems to solve the problem, it ignores one thing: What happens if the farming heirs aren’t able to generate the cash flow necessary to purchase the business from the other heirs?

Three potential solutions exist.

Consider setting up a trust

First, you can provide non-farming heirs with cash or non-farm assets as an inheritance, leaving the farm assets to the farming heirs. However, this isn't always possible.

Secondly, the parents can get a life insurance policy, providing the farming heirs with enough cash at the time of their death to make a down payment on purchasing the business from the non-farming heirs. This should allow them to cash-flow the purchase. However, life insurance can be an expensive solution, and Mom and Dad may not be able to get a policy if they have health problems.

The third option — setting up a trust — is the simplest and cheapest. Placing the real estate into a trust at the time of the parents’ death forces the farming operation to remain together until a predetermined time. This time frame allows the farming heirs to buy out the non-farming heirs.

The best overall plan may be to ensure that the farming heirs receive the operating assets at the time of the parents’ death, with the non-farming heirs receiving real estate held in a trust. This plan does not deprive non-farming heirs of their inheritance because they receive rental income from the land. Then, the farming heirs can buy out their non-farming siblings as their cash flow permits. And, members of the trust could purchase the shares of other non-farm siblings if someone needs cash.

If your goal is to keep the farm in the family, you have to create a plan for the children who want to farm. Create the necessary documents to ensure that the plan takes place. Be sure to discuss the general details of the plan with all of the family members involved, so everyone knows your intentions.

Don't make the mistake of forcing the children to work out the problems themselves. The stress involved can lead to destruction of the family.

Darrell Dunteman, AAC, is an Accredited Agricultural Consultant and accountant with offices in Bushnell, Ill.


Get help

Want to get more ideas for your estate plan? An excellent reference source is Farm Business and Estate Planning by Neil Harl. This valuable reference guide is more than 300 pages long and written in easy-to-understand language. This book is available for $26.95, plus $3.50 shipping and handling from Ag Executive, 115 East Twyman, Bushnell, Ill., 61422. (Illinois residents must add $1.68 sales tax.)



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