How to keep the inheritance plan fair after land prices surge

Problem: Another surge in land prices makes a couple wonder how to keep their inheritance plan fair. (submitted via email from N.H.)

On several occasions, my wife and I have thought we kind of knew what we wanted for our plan, but land prices keep going up and it seems like the target keeps moving. We have three kids and 900 acres. One of our children is farming with us. We still want to keep this farm together, but how do we keep current and fair with inflation that seems crazy?

• READ MORE: Estate planning columns from Myron Friesen

Solutions:

Let's start by being honest. There's not one exact, perfect, always-fair way to figure this out. Here are some questions to begin the process:

1. Do you want all three children to own the land?

• If no, then how much cash and other nonfarm assets should others get, and where will it come from?
• If yes, will there be any restrictions on the land? If so, how will rent and buyout prices be determined?

2. Do you want your children to have equal value? Or equal income? This gets really interesting when we start discussing the asset value vs. the income-producing value.

Let's a do a quick example using $10,000-an-acre land so each child would have a "bucket" worth $3 million. This assumes they get 300 acres of land at $10,000 an acre. Whether they get land or cash, $3 million is the magic number because that is "fair," right? However, if you want them to have equal income, then let's say your plans indicated they could keep their land and collect rent at $300 an acre. Now they would receive $90,000 of income by having 300 acres × $300 per acre.

• READ MORE: How to manage the complications of estate planning

Which way do you think you want to go to keep things fair? Every child gets $3 million of assets? Or every child gets $90,000 of income? Which is it? Let's say you want to keep the asset value the same, without any restrictions, and a nonfarming heir decides to sell for $3 million to invest the money in the stock market for an average return of 7%. Now that child's income jumps to $210,000! This is exactly why heirs often sell.

On the other hand, if you want to keep the income the same, then the nonfarming heirs could get about $1.3 million of cash and invest it in the stock market with a 7% return. Their income would be right back to $90,000. Which "fair" do you want?

Now, onto your question of how to deal with inflation. You could implement some sort of moving target, but consider this: Somewhere along the way to accumulating your 900 acres, you likely had to settle on a price with the previous sellers. Let's say you bought some of that land 20 years ago for $2,500 an acre and were happy with the deal.

Do you feel like you now owe the seller more money just because the land is worth more today? Probably not! So why is it bad if you set the price now for a distribution that might occur at your death 20 years from now? You already set the price for what you have. Do you think it is wrong to set the price for the next generation?

Right now, we are in a dynamic environment. We face potential tax law changes to stepped-up basis, capital gains tax rates, and inflation. This environment will paralyze some people and "freeze" their decision-making.

In reality, you can still do your part by setting a price on what you have and defining what "fair" means in your family.

Check out our website at farmestategps.com for more ideas on valuation methods and other topics.

Myron Friesen is co-owner of Farm Financial Strategies in Osage, Iowa. During the past 21 years, he has worked exclusively with farm families across the Midwest to develop farm transition strategies. Friesen grew up on a Mountain Lake, Minnesota, farm. He owns and operates a 1,070-acre crop and livestock farm with his wife and four children. farmestate.com