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Monday, October 31, 2011

Dividing Farm Estates With The Goal Of Equality


Once upon a time there was a farmer who left his operation equally to his two adult children, a son and a daughter.  After college the daughter raised a family a great distance from the farm, but retained interest in it, since that was her home.  The son inherited his father’s desire of farming and took over the operation after his parents passed away. The siblings were close and both made an effort to agree to the fairest division of the assets and revenue, but it was nearly impossible to figure out the best way to reach equality.  If you were the local wise man, what alternatives would you suggest?

In our fairy tale, which could be a real situation for any Cornbelt operation,  the wise man is Dave Goeller of the University of Nebraska, whose advice appears in the latest issue of Cornhusker Economics.  Goeller says there are several alternatives, and some have several alternatives themselves so there is no lack of ideas.

Goeller says the issue is the fact the son is investing more labor and management than his sister, but both share equally in the proceeds.  Son is doing the marketing, making capital purchases, and otherwise using his expertise to bolster the revenue for his sister. So how can the contributions of the brother and sister are evaluated?  If the farm had been liquidated and sold back to them, Goeller says that could not take advantage of early ownership and avoid the current high land prices. 

Goeller suggest several different ways to reach equality:

1) A cash payment could be given by the non-farming heir to the farmer for their contribution.  The labor and management could be assigned a fee and the farming heir receives compensation from his siblings.  If the farming heir brings another enterprise, then that should be evaluated for compensation as well.  However, if the operation is asset rich but cash poor, the farming heir is paid only with promises and good intentions.
2) A sweetheart rental arrangement could be given to the farming heir, in which a low level of cash rent would be paid to the non-farming heir, and the operation becomes the domain of the farmer, as any other cash rent operation may be.  Machinery could be leased by the farmer from the operation at lower rates, but there are tax consequences.  Both would share in the revenue generated.
3) Some heirs are unable to make the leasing payment to the non-farming heirs, but an option could be set up in an estate plan, allowing the farm to be kept in the family, with an accounting for the uncompensated value of the heir’s contribution if it is large.  In such cases, some alternatives may be a possibility.
a. A joint ownership of farm assets through long term leases, corporations, or Limited Liability Companies.  Those might own the farmland and machinery with daily control to the farming heir, with an exit strategy in place.  Those situations may create an unhappy owner who is displeased with the low rate of return of the farm.
b. Equal, but separate ownership of the assets may be a solution with a five or ten year lease to the farming heir with rent paid to the siblings.  That may give the farming heir the opportunity to prepare for a buyout of the non-farming heir with a right of first refusal arrangement.
c. There are many cases where the farming heir is left the assets, and the non-farming heir receives non-farming assets and each go their separate ways.  If the agricultural assets are the majority of the estate, then the non-farming heir would receive compensation if the farm was to be liquidated before a specified date.

Goeller says, “The important issue is not how compensation will be made, but if compensation will be made.  And if that occurs they will all live happily ever after.

Division of assets in a farming operation may seem difficult in the settlement of an estate, but alternatives exist that will approach equality.  Arrangements can be set up where a farming heir can either be compensated for his labor and management and revenue is equally divided.  Or the farming heir can be treated as a cash renting tenant with rent paid to a family corporation and the income divided equally.  A shortage of cash can also be resolved with rental agreements at a discount.  Whatever is decided fairness should be the objective.

Posted by Stu Ellis on 10/31 at 01:16 AM | Permalink

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