Succession planning for off-farm heirs inheriting land

Problem: Our off-farm children want to inherit land and rent it to our farming son; do we really need farm succession planning?

Our son farms with us and has grown our operation. Our other three children say they will keep their share of the land and just rent it back to him. As it is now, each child would get 240acres. We have a good family. They all have good jobs, good spouses, and get along well. We want to do the right thing, but we realize our son needs to grow the farm for his fam-ily too. What do you do when the off-farm heirs say they want the land? – Submitted by email from R.D

Solution:

It sounds like you have a lot to be thankful for, R.D. This may be hard to believe, but sometimes the "good" families have the hardest time planning because the problems aren't staring them in the face. Give me a son with a habitual spending problem, or a daughter who's on her third ex-husband, and I'll show you motivated parents with a definite direction in mind! But a productive family who gets along? It's not always so clear. The hard questions get overlooked because nobody wants to upset anyone. They just trust everyone to go along and get along. Never let a good situation prevent you from creating a great plan.

They say they want land. Wonderful! Would they buy land today? Here's a quick test. If each received $3 million, who would they call first? Their financial adviser to invest, their banker to pay off debt, their Realtor to find a vacation property, or their brother to expand the farm? Their answers might reveal their true priorities. Wouldn't it be good to design a viable exit strategy that recognizes these priorities exist?

What's at risk if they change their minds? Do the math for buying out 240 acres, 480 acres, and 720 acres. How many siblings could your son buy out before he taps out? How long would it take him to regain control over the 960 acres for his kids some day? We need to grow family farms, not divide them.

What if they're forced to sell? Health problems, financial struggles, untimely deaths, and divorces happen in life, even to "good" families. Would their net farm rent move their financial needle as much as a land sale could? Priorities can shift quickly after the parents pass away.

If they want land, does it take 240 acres for each to feel like they're part of the farm? Or would it benefit everyone if more land went to your farming son in exchange for some land plus cash or other off-farm assets to go to your off-farm heirs? My concern is this. What they say today may not match how they feel when things get real. That puts your farm succession at risk. Doing the "right thing" for your family rarely happens by doing nothing. Why not create a customized path for land ownership that includes contingencies in case situations change? You might focus on:

• Prioritized land and/or cash distributions for each child.
• Cross-purchase agreements if others sell or pass away.
• Valuation methods for family buyouts or equalizations.
• Funding strategies to purchase or replace family land.

I love working with good families. Thankfully, I come from a good family myself! But good families still have real problems to solve. If the viability of your son's operation depends on a collective "trust me" from his siblings and in-laws, that doesn't sound so good.

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 farm succession strategies at FarmEstateGPS.com.