Whether heirs are participating in the family business after the transition, or not involved, most families wish to treat them fairly. Fairness is a very subjective thing. Fair is not always equal. A good plan can make sure you wishes are really fulfilled.
In my upcoming session at the Farm Futures Business Summit 2016 in Saint Louis in January, we will touch on five things you need to start farm succession planning: Lifetime income, successor preparation, managed health risk, managed successor's risk, and fairness to heirs.
The fifth is to keep it fair to all the heirs by equalizing the inheritance.
Often families talk about fairness when they speak of inheritance. This may sound simple: tally up the value of the estate and divide it by the number of heirs. Of course, it's never that simple.
Often one of the heirs is more involved or interested in the family farm business. Sometimes heirs are not at all interested and would like a quick and clean inheritance and move on.
All of this is easier if there is sufficient cash in the estate at the time of inheritance. Here's an example:
The family farm of 500 acres is valued at $7,000 per acre plus $100,000 of other assets in the estate for a total estate value of $3.6 million. There are four heirs and the parents wish to give them all the same value from the estate, estimated at $900,000 per heir. One heir wants to operate the 500 acre farm. One heir wants cash right away.
Option 1: Farming heir writes three checks for $900,000 each to the other heirs, if he has $2.7 million at hand or can get bank financing.
Option 2: Farming heir purchases second-to-die life insurance on parents to provide cash to buy farm from the other heirs.
Second to die insurance is a great value. Often, it's $10,000 per year for each $1 million of death benefit. If the heir owns the policy and pays the premium, the death benefits will not be part of the estate and come to the heir income tax free.
At the Summit we will talk about all of this and leave plenty of time to answer your questions. I sure hope you can join us.
If this blog has got you thinking about your own situation, get in touch with my office (firstname.lastname@example.org).
Investing in a knowledgeable advisor and thinking about answers to key questions before putting pen to paper can make creating a farm estate plan much less complicated. Use the Penton Agriculture free report, Farm succession planning: Customizing a farm estate plan to get started on your own plan.
The opinions of Rich Dunn are not necessarily those of Farm Futures or the Penton Farm Progress Group.