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What do you do with the farm when you have three children and only one wants to farm?

Wesley Tucker for Progressive Forage Published on 30 October 2019

Many farm families have wrestled with this issue. Complicating it more is much of the farm’s value is tied up in the land, livestock and equipment. Often there is very little cash, life insurance or retirement plans to use for balancing it out. If the farm is split, will there still be enough critical mass to survive?

If the heir returning to farm is forced to buy out his or her siblings, will the debt load make it impossible to sustain a viable farm business? How many times should a farm be purchased? Every generation? Just remember: Early in life, decide to only have one child, and this all becomes easier.

You can easily find plenty of articles about terms such as “sweat equity,” “fair” and “equitable” division between on-farm and off-farm heirs. Is “equal” the same as fair or equitable? I have counseled enough farm families to know the answer to that question is often different for each family. The real question to ask is, has the on-farm heir been adequately compensated for his or her contribution to the farm?

I have seen situations where a son or daughter was told, “We know you can make more in town, but this is all we can afford to pay you. But we will make it up to you some day.” What does that really mean? If it’s not put in writing, often it means absolutely nothing. Years later the farm is split equally between those that helped build it and those that did not. Alternatively, I have seen families where the on-farm son or daughter is given a house to live in, vehicle to drive and compensated considerably more than he or she could make in the next-best alternative, while siblings had to get out and make their own way in life.

Compensation = Contribution

Is the on-farm heir being adequately compensated for his or her contribution? If undercompensated, then why and how can it be made right? Low farm profitability can make cash a scarce commodity. However, while farming may not be a strong cash generator, it is more likely a good wealth accumulator. While land prices go up and down, historically it has appreciated about 6% per year, meaning it doubles in value approximately every 12 years.

If the on-farm heir is only paid a salary of $25,000 per year, while classmates become welders making $70,000 per year, why not consider letting the heir share in the land appreciation? An option is giving him or her a small percentage ownership in the business each year. It could be written as a shared appreciation agreement where he or she gets to share in the increase in farm value.

Ever-increasing land values raise the question: What is “sweat equity” worth? For example, the farm was worth $500,000 when Roger (one of three children) quit his job and returned home to help his mom run the farm after his father died. But now, 20 years later when Mom passes, it is worth $1.5 million. How should it be split among the three kids? Was Roger adequately compensated while he assisted Mom? If not, I sure hope Mom made provisions for Roger in her estate plan. Not all examples are this clear where an heir made a drastic change to return home and help. Each situation has a different value of “sweat equity,” or lack thereof, contributed by the on-farm heir and to profitability and farm growth.

Again, my experience working with farm families has shown me each situation is unique and there is no cookie-cutter formula. Every farm couple should decide what they want to happen to their farm when they no longer want or are able to farm. Remember, we owe our kids nothing but to love, guide, and teach them how to be productive and responsible adults. What you decide to do about the future of your farm is up to you.

Most importantly, please make those decisions now, put the plan into action and communicate it with everyone. If you want your children to speak to one another after you are gone, you need to make the hard decisions now. Making no decisions and leaving it for your kids to sort out after you are gone can lead to hard feelings and often results in long-term family disputes. Don’t be afraid to ask each of your kids what fairness looks like to them as the farm transitions to the next generation. In the end, muster up enough courage and make the difficult decisions, then let everyone know. Your kids may not like your decisions, but they will not hate you. But there’s a good chance lasting family disputes could be your farm’s legacy if you don’t find the courage to do what’s needed.  end mark

Wesley Tucker
  • Wesley Tucker

  • Field Specialist in Agricultural Business
  • University of Missouri
  • Email Wesley Tucker

Tools to Consider

Life insurance

Life insurance can be the great equalizer. If parents are insurable, life insurance can be purchased naming off-farm heirs as beneficiaries. This is an excellent way to send cash their way, while the farm goes to the successor.

If a successor knows the farm will be split equally among all the siblings, and no preparations were made by parents to prevent the heir from being forced to come up with a lump sum to buy out siblings, then the successor should consider buying life insurance on his or her parents. While it may sound like a morbid concept, life insurance can be the mechanism to provide the cash needed to buy out siblings when parents pass.

Buy-sell agreements

Parents and the successor can agree upon a buy-sell agreement while they are still alive. The parents can agree to favorable terms that give the next generation the best chance to be successful. It can be an agreement to sell at a later date or immediately. It does not have to be at full market value and can be structured as an installment sale to possibly avoid large income tax consequences.

First option

If the land is going to be split equally, the on-farm heir can be given the first option to either lease or purchase their siblings portion. Once again, the parents can include favorable terms of the lease or purchase, such as specific payments and interest over 15 to 20 years. This avoids the need to come up with an immediate lump sum payment and often represents a more favorable purchase price and terms than the siblings might offer.

Organized business structure

Parents may choose to create a legal business entity such as an LLC or corporation, where all siblings share ownership of the business, but the successor operates the business on behalf of the other members. The successor may be given a controlling interest. Terms for buying each other’s interest might be included.

Separate business entities

Often, it may be helpful to consider splitting the farm enterprise from the ownership of the land. The parents and successor may form a legal entity to operate the farming business together, while the land may be held separately to be split among all siblings. That way when the parents pass, the on-farm heir gets control of the operating business (such as livestock and equipment), while the land is dispersed separately. Once again, the estate plan may include requirements for right to lease the land by the successor for a guaranteed number of years, or a first option to lease or buy.

—Wesley Tucker for Progressive Forage