Farmer asks how to unite a farm divided among multiple families

Problem:

My parents left 1,200 acres divided equally between me and my two non-farming siblings. They left us zero options in their will. Fortunately, we all get along great. Both siblings want to keep the farm intact. That’s wonderful because we can’t afford to buy them out! But what do we do for the next generation? Our middle son farms with us. Our other two kids do not. Someday, our kids will own the land with their six cousins, who are far removed from the farm. They don’t even know where most of our land is. How do we keep our farm together when it’s already divided between families? 

Solution:

Sometimes I jokingly ask, “Do you want me to be honest, or do you want me to be nice?” Those approaches often will yield two entirely different answers! Honestly, you have a lot at risk. Here are my concerns:

• Control: The decisions of your siblings, in-laws, nieces, and nephews now impact the viability of your operation going forward. Each one may have different expectations for income and liquidity needs in the future regardless of what they say today. 
• Contraction: Your parents owned and operated 1,200 acres. But if you continue this default distribution, your son will own 133 acres. That’s an 89% decrease in the land base. We need to grow our farms, not divide them. 
• Cash flow: If it doesn’t cash flow to buy out your two siblings today, how will your son be able to buy out eight other heirs?

Here’s what’s nice: Your siblings want a plan that works for everyone. Could you all agree on these three core principles?

1. The family farm should be preserved for the next generation.
2. Family members should have rental and purchase options before any outsiders do.
3. Everyone needs an agreed-upon exit strategy that doesn’t bankrupt the farm.

You can build a solid plan if there’s agreement on these principles. First, identify the preferred vehicle to hold and transfer the land to the next generation. Establish the rental options and management control within that vehicle. Next, develop a valuation model and buyout terms for any land sold between family members. Then do the math. What’s it going to take financially to make it cash flow between generations? Funding options often include cash assets, bank financing, and/or life insurance. 

There are many ways to structure this. Here are three possibilities:

1. Estate Documents 

Each family modifies their wills/trusts to reflect the core principles as noted above. Your risk is that they (or their surviving spouse) could change their documents without your knowledge. 

2. Third-Party Agreements

Operate under a long-term lease, and draft formal purchase options signed by everyone. Recorded agreements can take precedence over wills/trusts and require all parties to sign off on future changes.

3. Land Holding Entity

Design the entity’s operating agreement around the core principles. This maintains operational consistency for your son regardless of ownership. Each family can independently control how they distribute their ownership to their respective kids. Percentages of the entity could be incrementally sold, gifted, or inherited back to your son over time.

In a perfect world, farm succession planning starts at the top with the parents. However, sometimes we simply don’t get that option. Bringing your parents’ divided farms back together may be a challenge. But seeing three families work together to meet that challenge is honestly nice.

Mark McLaughlin is an associate with Farm Financial Strategies and a co-owner of Farm Estate GPS in Ankeny, Iowa. He grew up on a family farm near Defiance, Iowa, and shares in the fifth generation of ownership. McLaughlin has helped farm families across the Midwest develop their farm succession strategies for the last 18 years. Find an online resource to help families understand their options and take control of their succession strategies at farmestategps.com.