A roadblock in building a family farm transition plan is when parents are faced with the challenge of how can they treat the farming siblings and the non-farming siblings fairly in their estate plan. The key may be to treat them fairly avoiding the “treating them equal trap” which often results in breaking up the farm business into non-functional parts.
Over time, these dysfunctional parts of the former farm, which are now owned by active and non-active family members, can hamper the ability for the “family farm” to survive. The active farming family member(s) need to have the option and opportunity to keep the farm assets intact. In this current economic environment, some families combine some gifting and discounted sales of assets to the next farming generation.
If transition is scheduled to take place when members of the senior generation retire or die, the next generation is often also in retirement and not in a position to operate the family farm. This means that the major components of a functional farm unit, the farm’s equipment, buildings and in some format the land base, need to remain together as a package if at all possible. One needs to keep in mind the needs of the active members of the family farm. Michigan State University Extension recommends looking at what options or considerations are available in developing a fair mix of gifts, sales and distributions of assets between the heirs.
Non-farming heirs often have plan options that include a package of the non- farm assets which include cash, investments, and IRA or retirement accounts. But with many farms, these sets of assets are still much smaller than the total value of the farm assets (equipment, buildings and land). So what else can be considered? It will take some effort and planning, but looking for methods to provide for the non-active farming family members to take a share of the estate in non-farming assets will provide the greatest opportunity for the family farm to survive.
In the current economic environment some families combine some gifting and discounted sales of assets to the next farming generation. The sale can generate cash that can be used to support the senior generation and to create a non-farm investment fund for the non-farming family member’s inheritance. These non-farm funds from the sale of farm assets to the farming family members can be directed to the non-farming heirs through the senior generation’s Will/Trust.
Other highly valued assets, which are often considered for the non-farming heirs, may be the sale of development rights for the farm land which include oil and gas development contracts, wind farm development contracts and natural resource or farmland preservation values which could all be directed to non-farming heirs. In the case of an oil or gas well, the total income generated has the potential to be greater in value than the total fair market value of the land itself. Some farm families have established long term land holding trusts which generate rent income for non-farming heirs and still make the land available for the farming heirs. This works well if an option to purchase is also in place so the farming heir can buyout this arrangement in the future and continue the family farm for another generation. However, the non-farming heirs may consider themselves shorted if they do not have an option to cash-out their interest so having terms for a buyout needs to be part of the package.
As you can see, several aspects of a family farm transition often lead to and are linked to the estate plan that is tied together and must be in place. Every farm family is encouraged to engage assistance from individuals who have experience and understanding of this sometimes complex part of the farm business plan. Consider building an action team of professionals and family members who can work together to get your farm transition and estate plans in place. Doing this will greatly increase the potential that you will be part of a family farm that continues into the future.
Transitioning the family farm has been the focus of a five-part series of articles.
Steps in getting your farm transition plan in place:
- First line of paperwork is a will and/or trust (part one)
- Second step is to make sure you are maintaining a current and very detailed Balance Sheet inventory. (Part two)
- Next step are members of the family farm business setting goals? (part three)
- Next step developing a Vision for the farm business gives focus to a transition plan (part four)
- Next step balancing farm and non-farm issues that impact the farm business transition. (part five)
If you are part of a farm family wanting to keep the farm business alive and successful, it will take some effort and a common focus by the current and future generation of owner-operators. What is special about farming is that each farm operates with its own individual enterprises, resources, management styles and personalities that are different from the next one and so no universal plan will fit every situation. Additional resources and information can be found on the MSU Extension FIRM web site.