Case #0337

Written by Michael Baron on . Posted in Equalization

Bob and Carol worked with their son, Chad for the past sixteen years. They have three other children who worked on the farm when they were at home but left for other endeavors when they finished high school.

Chad spent almost four years in school prior to his return, a great deal of time learning about new technology. He helped Bob learn how to use the equipment they acquired over the past decade. Without Chad’s help, Bob would have been lost on the programming and technology necessary to run today’s machines.

Bob and Carol came to me to ask what the fair thing to do for Chad was, either in their will or during their retirement years. They also wanted to know what the other children should receive from their estate. In other words, ‘what’s an equitable settlement for all of the children?’

I don’t have a stock answer for this but I do have a series of questions I ask my clients to determine what Chad’s value added to the operation.

For instance ‘What kind of debt to asset ratio was there at the time when Chad started farming and how was he paid?’ Bob responded ‘There was quite a bit of debt in the farm operation when Chad started and probably represented close to 40% of the entire farm operation. Chad was paid minimal wages when he came back to farm and Chad’s wife had to support their then growing family’.

When Chad came back to farming, he came back when farming was not as profitable as it is today. In fact, when Chad came back the farm operation labored with debt and had it not been for Chad’s input – from a labor and technological aspect – the farm would not have grown to its value today.

I asked Bob what he thought. ‘If the farm was in debt to the tune of 40% of its net value at the time he came back, what percentage of that debt was retired because of Chad’s inputs into the farm?’ Bob responded that Chad  contributed at least fifty percent of the debt pay off during the years he worked with his father and mother.

I then asked ‘If Chad helped pay off fifty percent of the debt at that time, would he not be entitled to at least twenty percent of the farm’s current value today?’ Bob thought about it and said ‘When you look at it that way, I guess he would, wouldn’t he?’

In any businesses where there is debt of a substantial amount at the time of taking on a partner, the partner should be entitled to that percentage of the business in the future if it’s paid off due in some part to his or her involvement in the business.

The other thing I asked Bob and Carol was whether or not Chad’s interest in technology and new farming methods had benefited the farm. Carol said ‘If Chad hadn’t gone to learn about how to run these machines, we’d still be running combines and tractors from 1999!’

Both Bob and Carol thought that Chad’s education and continuing learning had brought them from ordinary yields – and returns – to extraordinary yields and returns. When asked to quantify what that meant to the farm operation, Bob and Carol both thought it was worth probably fifty percent of the growth in the farm since Chad had come aboard.

When dealing with second generation children, you have to ask yourselves these questions: How long have they been with the farm operation? What kind of debt did they help resolve along the way? What kind of inputs did they individually bring to the operation that increased the value of the farm today?

When you stop and put numbers and percentages to all of these questions, resolving an equitable estate plan is easier than you might think.

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

Michael Baron is not an attorney. Information given through written, verbal, or electronic means by Michael Baron or Great Plains Diversified Services, Inc. is not to be construed as legal advice. An attorney, tax advisor, or other registered advisor is needed for the completion of the estate planning process. An attorney must be consulted for legal advice and the drafting of legal documents.