As a financial advisor who’s spent her career in the midwest, I’ve worked with more farm families than I can count. From buying new expensive equipment to riding out the drought years, there can be millions in play even on small family farming operations. Estate planning – splitting up the land between the kids – can be one of the most complex parts of the journey.
I was surprised to find out that 40% of the country is still farmland! There are few sights more American than the sun-splashed cornfield, even in our post-industrial, digital world. Despite the idyllic setting, a farm is a complex small business, and passing it on to the next generation takes a carefully constructed succession plan and three-dimensional thinking.
An Emotional Note
One aspect of this estate planning for farmers that may not resonate with modern city-dwellers is the legacy tied to the land. This isn’t just a few thousand acres of dirt, it’s the theatre of entire lives – kids born and raised, livings made and lost – the land is like a family member.
It’s true that wherever there’s money, there’s emotion, but even more so when there’s family land in the balance. We have to make space for the X-factor of emotion, heritage and family legacy into any planning we do around farmland. If we’re aware of that from the beginning, then the process will be richer and cleaner.
That said, there are a few approaches to farm business estate planning for farmers that I’ve used with farm families in the past. The process demands the soft skills of listening and empathy to maintain strong family relationships in some cases.
Let’s look at these approaches, then the pros and cons of each, as well as the values that drive them.
Farm Estate Planning Method 1: Pass It on to One Child
On the surface, this method looks the least complex, and perhaps there’s a reason that ancient societies passed on land to the first-born son. This approach can also help in families where one child, head-and-shoulders above the others, shows distinction as a farmer and enjoys it.
A farm doesn’t just pass on land, it passes on an entire lifestyle. In many farming families, one child may show acumen in the family trade while others aren’t interested, or sometimes can’t get away from the farm fast enough! Passing the land and farm assets on to the one who has done the most work, and shows a passion to continue that work, often makes the most sense.
The drawbacks appear quickly though. If you have three kids and a $3 million farm, what do you leave to the other two? The tension is obvious, and I’ve watched this kind of imbalance sour relationships in families for years. For many farmers, their land is by far their largest asset and may be impossible to offset for remaining kids.
Farm Estate Planning Method 2: Divide It Evenly
The immediate reaction here might be to divide up the farm evenly. Three kids, $3 million farm, three plots each. Simple right?
There are questions this does answer. The imbalance is not an issue, as they all three receive an equal amount. This also divides up the hard work and stress of farming three ways, not saddling one person with the business and perhaps the debts involved. Also if you have more than one aspiring farmer in the family, dividing up the land is only fair.
But this approach leaves us with plenty of questions. If you, like many farm families, have kids who are totally uninterested in that life, then they won’t know what to do with their part of the land. Farm assets also include necessary machinery and buildings – you can’t have the barn on one plot and the grazing meadow on the other. How will you divide that?
You also might run into the issue of leaving a non-viable amount of land to your farming children. If you divide up a 900-acre farm into 300-acre plots, the portion may not be large enough to draw a living, especially for a family.
Finally, farms often run with a significant amount of debt, like most businesses. Do you divide that up as well?
It doesn’t take long to run into the issues with this approach, despite its initial balanced appeal. There are ways of addressing the issues with the “even split” as well, let’s look at those.
One Kid Buys Out the Others
Dad took over for grandpa, my brother was a natural farmer from birth, and nephew was driving a tractor at 8 years old. I usually hear some variation on this story from farm families – the heir can seem very apparent.
Again, let’s start with the questions this approach does answer. It alleviates the question of imbalance in the inheritance, and it gives the other siblings some capital to start their adult lives in the buyout. It also cuts them loose from the lifestyle and stress of an agricultural operation. Finally, it gives the farming sibling the right and control to do what they envision for the business.
Yet leaving this up-and-coming farmer to buy out the other siblings can be a pretty tall order. Do you know many 30-somethings with the capital to pay a couple million for the family farm? Do you know young adults who can just go get a seven-figure loan?
The buy-out option can be flat out impossible or leave the farming sibling saddled with debt or drained of the capital they need to run the business.
One Kid Cash-Rents from the Others
The farmer renting the land from the other siblings is also an option. This arrangement can provide the benefits of dividing the land while making it viable for the farmer.
Regular rent also provides a stream of income for the other siblings. Because this income is often supplemental, the other siblings can make the rates even more reasonable for the farmer, allowing them to develop the business.
But – oil and water? Nitro and glycerin? Money and family? An arrangement like this signs you up for a long business relationship with family members, which can lead to several issues. If the rent is a fixed rate and the farm doesn’t make as much money that year, what happens then? If the rate is variable and the other siblings think that the farmer isn’t working hard enough one year, what then?
Although this arrangement is very popular, it’s not without issues. Sibling rivalry can take on a whole new dimension when money changes hands.
Incorporating the farm, becoming an LLC, partnership, or S corp or C-corp is another variation on “dividing it evenly.” Incorporation can help provide structure of the finances of the farm, and a clear plan for distribution by giving shares to all involved. It also offers some insurance protections as well as tax efficiency.
Again, personalities are involved here as well. The income of the farm may fluctuate, which means share size changes year to year, and that can create tension. Incorporating also increases complexity, which means issues with the IRS could crop up unless you work closely with your advisor and CPA.
Farm Estate Planning Method 3: Life Insurance Strategies
I’ve had some success coaching families through life insurance strategies as a way to both even out the inheritance and simplify the process, especially for those who don’t wish to be involved in farm life. There are options and variations here, but let’s look at the basics.
The owner of our hypothetical $3 million farm has one child who will become the farmer, and two who aren’t interested. He wants an equal inheritance for his children, and so his advisor suggests life insurance. He’s able to find a $6 million policy that he can divide between the other two kids when he dies.
Now, there are a few issues that come up here. First, the senior farmer wants to retire at 70 and completely walk away from the farm financially. He will need to pass the business on to his son then, and hopefully that will be at least a couple decades before he dies. So, one child will receive his inheritance before the other two.
The other issue: $6 million in life insurance is not cheap, and the farmer and his wife will have a change of income in retirement and might not be able to cover it.
One strategy here is to have the farmer’s son pay the life insurance for the other two for the rest of the senior farmer’s life. Once the policy pays out, the other two siblings get their share and the farmer son keeps the business. In real life, this may be more complex, but it’s one of the closest equivalents we can get to dividing up the land evenly.
Farm Estate Planning Method 4: Liquidate
Because of the emotional relationship to the land, this route may not appeal to many families, but it bears mention. This method is what it sounds like: sell the farm, equipment, everything, and then divide up the capital between the kids.
Liquidation is by far the easiest when it comes to distributing the assets, because they are in cash that can be taken down to the penny. This can also appeal to families in which the kids aren’t interested in farming. It’s not a job, it’s a lifestyle and a calling – if you don’t want to be a farmer, you really don’t want to be a farmer!
Farming is changing as a profession with the rise of factory farming and continued innovation on how the work is done, so a small family farm might not be as viable a living as it once was. Also, difficult farming years can quickly become difficult decades. Parents may not want to pass on the sheer exhaustion and stress of the work.
The advent of the internet and the increasing mechanization and mobility of the modern world has brought a cultural shift to work and vocation. Taking up the family business is not as viable, nor as culturally expected as it once was. Tradition and identity in your family, as well as the personality makeup of your kids, all need to be factored into these decisions.
Taxes will affect any strategy when it comes to estate planning. From the elimination of the stretch IRA to raising the lifetime/estate exemption amounts, transferring wealth has changed a lot in recent years. There are a few things we need to keep in mind when transferring farmland.
Gift Tax Exclusions
The annual gift tax exclusion is set at $15,000 per year before you potentially run into taxes. So, while the senior farmer is alive, before or after retirement, he could pass on the business to his son $15,000 at a time to stay below the tax radar.
The ceiling is much higher for lifetime and estate tax exemptions, at $11.58 million. This is the total amount before estate taxes, which are about 40%. So, if you gifted $5 million to your kids during your lifetime, you could give another $6.58 million at death before taxes applied.
Now, even the most successful family farm is far from hitting that threshold, but it serves us well to be aware of tax changes that could come. In my experience, inherited wealth is one of the favorite places for the government to find tax revenue, and an act of Congress or a change in the White House could quickly move the goalposts.
Not Just Land
Plenty of blood, sweat and tears go into farmland. It’s not just where you work, but quite literally where you live, where you will spend most of your waking (and sleeping) hours. Estate planning for farmers is much more than dollar figures and spreadsheets, and that’s why it’s best to start early and take your time.
As you can see even in this brief introduction, estate planning for farmers involves legal fees, tax strategy, insurance concerns and plain patience. Sit down with your family and your financial advisor to clarify the goals, dreams and values that will drive these decisions, and take care of yourself, too. It’s not just land – it’s legacy.
Need help putting together your estate plan or want to talk about your overall financial strategy? Let’s talk!