Case #1434

Written by Michael Baron on . Posted in Farm versus Non-Farm, General Estate Planning, Transferring Ownership

Don and Jenna have a family farm operation. One of their children is interested in the farm but is not an active participant. Their son, John, helps when he can and also farms a few quarters on his own with the help of his dad, Don, doing the majority of the heavy lifting. There are two other siblings, Rich and Shannon, who do not farm and haven’t been involved since they left for college.

Facts: Over the last ten years, the farmland has appreciated greatly – being positioned in the middle of many large producers who are committed to growing their operation. As a whole, the operation is not a huge income producer however – being half livestock and half grain operation and some hilly, rocky land in the pastures. The value of the land to the neighbors is far higher than the income value of the business located upon it.

John has come to them with a proposal. Upon the second death of Don and Jenna, he would like to buy out his siblings – if he can get the land for fifty percent of its current market value – or a true value based on the income produced by the land. If the appraised price should be lower than this value set, then John would have the option of taking the lower value. In addition, he would receive the machinery and any livestock. Currently, John has a good job, with better than average income, and his wife does not want to live in the country.

The Issues: With John not being in farming full-time, we don’t know how this is going to play out down the road. If John should be given the option to buy out his non-farming siblings, who’s to say what happens if John decides not to farm – after his parent’s deaths – and he decides to sell the property? I’ve always thought about this and thought ‘Gee, if my sibling got the farm for half-price and then resold it, I’d be angry!’

As such, many of my clients put wording into their wills stating ‘Farming child can buy the property for X price (fifty percent of appraised, a set price, or some other value set in the will) and if s/he re-sells the property within (ten years, fifteen years or whatever the parents decide) then the proceeds of the sale – over and above the purchase price – would be split between all the children.

By doing this, if the child resold, died and left the farm to a spouse who sold, or to heirs who sold within the prescribed time, then there would be equity in the estate plan. This works well with children who’ve spent their lives working with Dad and Mom on the farm.

In this case, it was a bit different from your average because John worked on the farm – but he also had a good job off the farm and was receiving more income from off the farm than he could farming. So, in this case, the question was maybe John would buy the farm at the lower price and he would rent the place out to the neighbors while working at his other job. Sure, he might keep doing his two quarters he’s doing now, but would he really leave his job to farm full-time? And if he wasn’t going to farm full-time, was it right to the other children he got to buy this asset for less than FMV, who could have also ‘farmed’ part-time if they rented some out and custom farmed the rest?

At what point do we draw the line and say ‘If you’re going to farm, yes, we’d like to give you a break on the family farm land from the kids who don’t farm’ and ‘Well, any of the kids would be happy to get these assets – as well as to their children’s estates – if this land is treated as merely an investment/return vehicle’. How much time does a child have to be on the farm, get their living from the farm, how much of an investment they make into the farm business before we can give them a break on the land?

Secondly, how many different conditions do we put on the land after our death(s) to our child who paid less than FMV to the siblings (such as the aforementioned re-sell, repay the other siblings clause) and how can I make them enforceable?

If the other children come back to visit and find their brother hasn’t visited the land in five years, should they feel angry about giving him such a break on the land? If the brother dies and leaves it to his wife and children and they sell it to the highest bidder, would the other children have a right to come in and claim some share? If the entire farm – or even a majority of the farm – is custom farmed by the brother – something any one of the children could have done – would the other siblings be angry being cut out for less than FMV on the land?

When we used to discuss farms in the eighties and nineties, we’d talk tens of thousands of dollars, believe it or not, farm families got along pretty good.
Now that just about every single farmer, rancher or ag retiree has to put that word ‘millions’ into their net worth statement, we’re starting to talk about serious, serious attention being paid to the estate plan and how it plays out for all the heirs. Heirs may have passed on a few hundred thousand here and there, but the word ‘million’ kind of perks their interest quite like no other word before. And why not? This is not just lifetime changing money – this is generation changing money! Kids, grandkids, great grandkids could all benefit from this kind of money!

In any case, if you were wondering what the answer to the above questions are, the answer is you’ll need to talk to a highly qualified farm estate specialist – one who is willing to wade through all of these questions first with you, then with your children – and come up with the best answer. If you don’t know of anyone, call our office and we’ll be happy to give you our list of names.

“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.