Farm Horizons, June 2015
Will your farm continue for another generation?
By Myron Oftedahl
Is the next generation of your family interested in farming? Are you interested in passing the farm on? Is one, or more of the next generation currently involved in the farming operation?
I am going to direct most of my comments to the older generation first, but I’ll give some advice to the younger generation, also.
If you have one or more of your children currently involved in the farming operation, that is a good start. Now for the tough question; are they really interested in farming, or are you an easy boss? Are they getting paid for what they are worth, or do you feel responsible to pay them more because they are your family?
Let’s assume that your farming son/daughter is earning the wages that you are paying them. Do they help make management decisions, or are they just hired labor? Have they invested any money into the operation? Do you give them areas of responsibility? I recently heard a speaker state that the number-one job of a business owner is to train and mentor their replacement. How are you training and mentoring the replacement for yourself?
It can be hard to do, but you need to begin to let go of some responsibilities. Start small, and give them responsibilities that they can handle. Let them make some decisions, and allow them to make some mistakes. When they do make a mistake, sit down and talk with them about it. See if they recognize the mistake first, and then discuss some alternatives.
As the senior generation, you need to accept that the younger generation may have some ideas that are different from how you have done things in the past. It doesn’t mean that the ideas are wrong, it means that you need to discuss them. Maybe the idea could save the farm some expenses, or improve production. You almost certainly don’t farm the same way that your parents did. Be open to ideas. Not all of them will fit or work on your farm, but maybe the idea will help form something that will work.
Transitioning a farm business is not easy and requires a lot of serious discussions. It is important that all of your children understand your wishes concerning the farm. The other siblings need to understand that the son/daughter who is farming with you is probably not earning the same wages that they are in their non-farm job, that they are working more hours and investing some of the money back into the operation, so they should get treated differently in the estate.
I can give you examples where this has worked well, and I can give you examples where it has not worked well. Usually, when it does not work well, there is so much stress between siblings that the family ties are torn apart. The best gift that you, as the senior generation, can give your children is a well thought-out estate plan. If your wish is for the family to continue to get together for holidays and birthdays, then it is your responsibility to have a will and a transition plan in place.
The will allows you to transfer ownership without probate. Typically, we want the real estate to transfer through the estate, because then we can receive a stepped-up basis.
What this means is, if you purchased the land for $500 per acre and maybe added another $700 per acre invested in tile and other improvements, your basis in the land is now $1,200 per acre.
If you were to gift the land to one of your children, their basis in the land will be $1,200 per acre. If the land passes to the child through the estate, then you will receive a stepped-up basis to what the current value would be.
So, the basis in this piece of land now becomes $6,000 per acre. The basis is not important if the child never sells any of the property, but if they should decide to sell some or all of it, the capital gains tax will be calculated on the difference between the selling price and the basis. So, it can be a very expensive transfer if not done correctly.
What needs to go into the will? Basically, the will states the property, and how the property will be transferred or disposed of. The will can set a price for the land or other assets if all of the assets go to all of the children and the farming sibling needs to purchase the other shares of ownership, or maybe rental values if the land and machinery transfers to a trust or LLC.
Often if the land goes into a trust or LLC, all siblings own shares. The farming sibling pays rent to the trust or LLC; the trust pays any loan payments due, the real estate taxes, and sometimes the insurance. What funds are left then get divided between the shareholders at the end of the year.
What if you don’t have a will? You need to take your balance sheet and decide how the assets will be handled. Does all of the farm equipment go to the farming heir? Are there any off-farm assets which can go to the non-farming heirs? Just remember that fair is not always equal.
Once you have decided how and what you wish transferred, you can contact your lawyer and have the will drawn up. Make as many of these decision as you can ahead of time so that you can be efficient with the time spent with the attorney. Attorneys often bill by 10th-of-an-hour increments, so every six minutes is costing you. Some attorneys will have a flat fee to write a will.
Now, some advice to the farming heir and their siblings: You are not entitled to anything.
If you are the farming heir and are anticipating that the farm will pass on to you, you need to have a discussion with your parents and encourage them, help them to get the estate in order, and explain to all of your siblings what is going to happen.
Keep lines of communication open, so that the family does not get torn apart. Have everyone involved in the process, so that there are no misunderstandings later.
You, as the farming heir, can purchase life insurance on your parents so that you have money to buy your siblings’ share if necessary. Your parents can gift the premium to you, but if you are the owner of the policy, then it stays out of the estate.
So, to all parties involved, a little or a lot of planning now will make things go much smoother later.
The next big step is to be sure that the will is up-to-date. A lot can change in a few years. Do an annual review of all of your estate documents, the will, power-of-attorney, the health care directive, etc. Notify your lawyer if anything has changed. Inform all parties where a copy of the will and other papers are located.
If you need help, there are a number of workshops available, or you can contact a farm business management instructor for assistance.