MAKING GOOD DECISIONS FOR THE NEXT GENERATION


Anyone involved in agriculture knows that we are currently experiencing tough times.  Several years of low commodity prices have eroded much from the “good years” that we all experienced a few years back.  However, most of us realize that farming is cyclical and are hopeful for better times ahead.
Succession planning and family fairness issues are easier in good times.  For example, if a husband and wife have three children, only one of which farms, the couple knows that in good economic times the farming child has a greater ability to buy out non-farm children.  As such, a husband and wife may have a plan where all three children inherit equally, knowing that the farming child will utilize the good economic times to purchase the interests of the non-farming children.

Father and son farmers planning for the futurePREPARING FOR HARD TIMES

The outcome changes greatly in harder economic times.  First of all, if the farming child(ren) does not receive an ample amount of the farm assets, then the farm can drastically shrink in size, therefore squeezing the farming child(ren) even more economically.  If the non farming child(ren) are agreeable to sell their interest to the farming child(ren), due to the harder economic times, it may be impossible for the farming child to purchase their siblings’ interest.  In the past few years I have had farming children look at me and say “do I really want to go more into debt purchasing the interests of my brothers and sisters with corn under $4.00?”
“I have had farming children look at me and say, ‘Do I really want to go more into debt purchasing the interests of my brothers and sisters with corn under $4.00?'”
The outcome changes greatly in harder economic times.  First of all, if the farming child(ren) does not receive an ample amount of the farm assets, then the farm can drastically shrink in size, therefore squeezing the farming child(ren) even more economically.  If the non farming child(ren) are agreeable to sell their interest to the farming child(ren), due to the harder economic times, it may be impossible for the farming child to purchase their siblings’ interest.  In the past few years I have had farming children look at me and say “do I really want to go more into debt purchasing the interests of my brothers and sisters with corn under $4.00?”
During harder economic times, succession planning should take into account the following:
  1. How much of the farm assets does the farming child(ren) need to receive in order for to viably continue to farm? In other words, if the farm is considerably reduced, can the farming child(ren) survive economically?
  2. Delay the estate distribution: It never fails that a non-farm child wants to sell their interest when tough economic times exist.  As such, a succession plan should consider having the assets held, in a trust for example, for a set number of years after the death of the parents.  That way, when times do improve, the farming child is in a better position to purchase the interest of non-farm heirs.  During such time, the farming child can farm the real estate, use the equipment, etc, pay a rent, and all siblings share in the net rental proceeds.
  3. Allow time for farming children to purchase the interests of non-farm children. One of the best commodities parents can give farming children is time.  For example, if the parents pass away, the succession plan can give the farming child the option to purchase the interests of the non-farm children over a certain time period, akin to a land contract.  Yearly payments can also be tied to the general health of the farm economy whereas the farming child pays less in bad years, more in good years.
  4. Utilize a LLC to hold farm real estate. A limited liability company (LLC) is an excellent legal entity to own farm ground.  Parents can establish rules in the operating agreement that spells out the price, timing, etc, that govern how non-farm children are bought out by the farming heirs.  Not only will the LLC help with the transition of the farm real estate, but it provides a tremendous amount of liability protection to the children while they all own a portion of the LLC.
The bottom line is that tougher economic times are going to dictate a more flexible succession plan.  Above all, farmers should recognize that a succession plan established in good times may not be suitable during poorer economic times.

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