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Dividing up the family farm

Dividing up some assets is a simple matter of math. However, other assets seem to pose as big a problem as the baby in the legend of King Solomon. Family farms, like that baby, are often beloved and hard to divide.

For those who have invested years of labor in a family farm or similar land-based business, the question of how to convey it can seem like a matter of intense emotion rather than ratios and residuals. But with creative estate planning, inheritance doesn’t have to be a matter of picking one heir over others or winding down a business you’d rather leave intact.

You may want to consider a variety of strategies, but the bottom line is that an imperfect plan is vastly superior to no plan at all. Taking a “wait and see” approach means that any unexpected twist could result in an outcome that neither you nor your heirs would prefer. Even if your plan isn’t ideal, you can review it and change it as you find something better. In the meantime, don’t leave the future of your farm to chance. Your estate plan must be comprehensive and exist in writing, not just in your mind. It must also take a form that can withstand legal scrutiny.

Avoid the trap of imagining that siblings who get along will be able to decide how to divide your property after your death. None of your heirs will be in a position to serve as an impartial judge, and even if they don’t end up disputing how to divide the property, you’ll have left them with a huge administrative burden (and potential tax) at a time when they’re grieving and dealing with the rest. of his heritage. You certainly need to involve them in your plans, but the ultimate responsibility is yours.

The solution that is best for you will depend on the variables at play, including the number of heirs you wish to include and the nature of the property you wish to pass on. Your heirs may have different levels of skill or interest that will dictate different roles in passing on a business. They may have had different levels of involvement in the past that also reflect these skills and interests. As with other estate planning concerns, it makes sense to differentiate between fairness and equality when dividing up the estate.

The most important decision will be whether to liquidate the farm and divide the proceeds among your heirs, or to transfer the operating farm, including the ownership, management and labor components of the business. The former raises its own estate planning issues, but is comparatively simple. For many, however, it is likely to be the most emotionally harrowing choice. Also, if one of her heirs has already invested a lot of time or effort working on the property, he or she may believe that selling the farm just to simplify the division process is ultimately unfair.

If you divide the estate equally without liquidating it, more questions arise, especially if you have multiple heirs. Will the child or children who work on the farm have to pay rent to siblings who have other careers? If the boy who works on the farm is outnumbered by siblings who don’t, could the majority outnumber him in important decisions about the future of the farm? If you prefer to give the entire estate to one child and give assets of equal value to others, how will “equal value” be determined? If you plan to break up a business or commercial interest that needs active management, consider the time and energy required to maintain the value of the entity; An interest in the farm is certainly valuable, but its value will be maintained through hard work, while liquid assets come with fewer strings attached.

Also remember that children or family members who have worked on the farm or with the property are likely to have different expectations than heirs who have not been involved up to this point. An adult son who has stayed behind and worked on her farm may well be dependent on her for her future support. If your farm is currently not profitable, it is also important to have a plan to address the shortfall during and after the transfer. Consider whether you are willing to finance capital improvements as part of the estate plan.

What if none of your children currently work on the farm? It is important to take time to teach your heirs how to manage what you plan to give them if they have not been part of the farm operation. If none of her children have the ability or interest to take over the day-to-day operations, even with time for training, she should accept it; she may want to transfer her farm as a working interest to someone else, structuring a portion of the profits to go back to her family.

Whoever you choose, identify your successor or successors, if you plan to transfer ownership of the operation. Have plans to transition to them at retirement, but also in the event of unforeseen disability or death, so all three scenarios have corresponding plans. Also take the time to discuss your plans with those affected, both your heirs and others with substantial interests in the estate, making sure they understand your intentions and the planned timeline for the transfer of responsibility. If you have children and plan to transfer the farm to someone else, you don’t want it to be a surprise.

You will need to plan your ideal schedule for the transfer. Consider how long you’d like to keep working (assuming you can) and what your sources of income will be once you retire. Do you want to continue working on the farm after you no longer own it? If so, can you withdraw from final decision making and leave it to your successor? Or would you prefer to take a more traditional and quiet retirement? Making an informed decision about how to divide the estate will also require a thorough and up-to-date understanding of your overall financial situation and estate plan, so that the transfer can work in harmony with your other constraints and goals.

Estate planning is always tricky, and especially with a farm or other business. You will need a financial planner and attorney with experience in estate planning matters specific to farms or other small business interests. If you are considering restructuring the business to accommodate multiple owners, you may want to seek out a management consultant with experience in agriculture. Unexpected life events aren’t the only reason to start planning early. Taking time to deal with estate planning issues allows for in-depth conversations with professionals and your family, where you can respond to their concerns and advice.

Once you know what you want to happen, the professionals you hire can help you understand the most effective way to structure the split and transfer. There are many options, with pros and cons. Often, there is no correct answer. Here are some factors you may want to take into account:

  • Minimize tax liability for you and your heirs
  • Risk management and creditor protection
  • How co-owners or partners will share management and/or profits
  • If and how profits will flow to heirs not involved in the daily operation of the farm
  • State Law Requirements and Restrictions

All of these factors and more can influence which planning solution is right for you. As with any business succession plan or estate plan, remember that planning is not a one-time event. Instead, it should be a process where you respond to changes and new information by updating your plans as needed.

The discussions and choices involved in dividing up a family farm or other family business will not be easy, but they are essential. The sooner you start, the more time you have to come up with a plan that is best for you and your family.

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