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Tuesday, October 28, 2008

Dividing Up The Family Farm:  Can Everyone Be Treated Equally?



 

Maybe it is just the folks you visit with more frequently, but it seems more than a usual number of farmers have decided they have had as much fun as they can stand, and are planning to depart active farming in the near future. For some that means a farm sale followed by a job selling equipment, seed, or farmland. For others that means turning over the family business to one of the kids who stayed home to work on the farm. But that becomes an issue when other children should share in the assets. What is the way out of the dilemma?

Frequently, farm families face the problems of transition. Either the farm is divided into a myriad of pieces that will not allow anyone to make a living; or a child who wants to farm has to buy his siblings’ land long before he can afford it. Farm transition specialist Dave Goeller at the University of Nebraska offers his idea in the Cornhusker Economics newsletter.

Goeller depicts a family with three children, one of whom came home to farm and became part of the family business. Prior to that time, it had been the plan of the parents to divide the farm equally among their three children. However, over time the contributions of the son who joined in the operation became significant. Additional land was rented. An additional enterprise was added. Machinery was purchased jointly. And the farming son had contributed a significant amount of “sweat equity” over time.

When it came retirement time for the senior generation, they faced the dilemma of how to treat each of their children fairly. If each of the three received an equal share, the son on the farm would not be rewarded for his contributions that enlarged the operation. And Goeller said a significant problem also results from the rapidly increasing land values that make intra-family purchases troublesome at best.

In this case, which would be applicable to thousands of farm families, the issue of “sweat equity” was converted from a problem to an answer. The parents developed a blended evaluation of the operation to allow all three of their children to share, with an additional element to acknowledge the contributions the “sweat equity” had made to the operation. The solution was achieved by comparing the size of the operation at the time their son joined the operation, to the size of the current operation. The difference was $900,000 and the son was credited with 50% of the growth of the operation or $450,000.

Since the initial value of the operation was $600,000, each of the children would receive one-third of the value, or $200,000. Additionally, each of the children would receive one-third of the value of the parents’ $450,000 contribution to the expanded operation, or $150,000 each. In this case, each of the three children received one-third of the parents’ assets, but the son who contributed the sweat equity was able to retain the full value of his contributions.

Goeller says one of the main issues is that everyone understands how the divisions are made, and that contributions equal compensation. He says since the family farm is larger and generates more revenue than it did when the son joined the operation, that son is rewarded for his “sweat equity.”
Is this example applicable in all situations? Goeller says no, because percentages will change, particularly in the sweat equity contributions, which could be substantially more or less. He says, “Treating unequals equally may be the most unfair thing you can do.”

Summary:
As challenges to farming increase, there will undoubtedly be increased turnover in farm ownership and management. A perennial challenge for many farm families is a fair division of the farm among children, some of whom are fully engaged in the operation and others who are totally disengaged. There are formulas that can be developed that will not only allow equals to share in the assets, but also allow unequals to be rewarded for their individual contributions.

Posted by Stu Ellis on 10/28 at 01:22 AM | Permalink

Comments

Stu, This is a good message from a good paper. I have another option that some ag economist should consider. It is the use of the IRS Special Use Permit for Agriculture. This allows a person to buy property for a legal, reduced price. The IRS Special Use Value for Agriculture can be useful to keep land in the family as it can allow a family member to buy the land for a reduced amount based on the average rent of similar land for the past five years, minus the average tax for similar land for the past five years, divided by the average Interest rate charged in your Farm Credit District the previous year. This will result in a purchase price of about half the value of the land. This is a tool to keep the land in the family If a heir does not sell the land, the value of it is not important because the purchaser will never realize it. If you buy into this premise, then the IRS Special Value for Agriculture can be a useful tool. This IRS rule has a penalty in it if the purchaser sells the land in the next five years. The local attorney that my folks worked with was David Smith in Oregon, IL (815-732-6124). This IRS Special Use Value made it possible for me to buy and keep the farm for future generations. Without this special arrangement the land would have been sold to settle the estate and the family farm would have been gone forever. David Smith deserves the credit for suggesting it and my folks for making it possible. Smith knew the IRS Special Value "tool" could be used to keep the farm in the family. -- Perhaps an Ag Econ professor could look into this option. Dave Smith would be a good source to start with. Best regards, John Croft

Posted by: John Croft at October 28, 2008 11:11AM

The son that stayed on the farm, if he had not, would probably have a pension especially if he had as big of responsibility as keeping the farm productive and providing support for the parents. How many years did he keep his parents out of the old folks home and at home, and what is that worth? Keep in mind that for most, the farm is the pension for those who stay and are on call 24/7/365. Is it fair at all to divide up the farm pension with those who should have earned a pension off the farm? Taking care of parents and overseeing their lives can be minimal or it can be all consuming, especially in the later years. I have seen farms go under that the money was sent off the farm. It usually takes everything just to stay afloat on farms and ranches. I say that if there is lots of money in the bank, divide it up equally and give the farm to the one that kept the parents going with his labor, and was responsible for a lot of dad's money in the bank. If the others contributed their time and labor, they should be rewarded porportionaly as to how much labor compared to the stay on the farm son. Treating your kids fairly can be a very long ways from equal shares. How many people do you know of that have payed off a farm bought from scratch in the last 30 years. Not many I'll bet. Probably not many of those paying for 1/2 of a place. The kid who stayed on the farm probably contributed a whole lot to paying off dad's mortgage. To make him pay it off again is a crime. The stay on the farm son has already contributed way more to Mom and Dad than can be imagined. Divide up the money, not the son's well deserved farm or ranch.

Posted by: Jim at February 21, 2010 11:11PM

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