Wallaces Farmer

How to make generational land ownership work

Legal Issues: Create an exit plan for relatives who want to leave such arrangements.

4 Min Read
Judge's gavel coming down on wooden stand
EXIT STRATEGY. Not all farming heirs wish to continue to be involved in the farm. Creating an exit strategy now for such individuals can save future trouble. Farm Progress

When I think about the farm where I grew up, I like to picture my kids, their cousins and their children all sharing the same love for the land I have. If it was possible to create the “perfect plan” when passing on your family farm to the next generation, we would have done it and there would be no need to continue to talk through these issues.

However, we live in the real world, where no plan is perfect. Chances are that a few of those relatives down the line won’t want to own land. No family looks like another family, and no solution is the same for each of those families. It can be tough to think about your children and grandchildren selling the farm in the future when you, your parents, grandparents or other ancestors have worked so hard to put it together.

Some families attempt to achieve the goal of “keeping it all together” by leaving land to their children in undivided, equal interests. The thought may be that owning land together will provide a steady income for some children or will encourage the family to stay together.

Flexibility is key

There are perils of owning land as tenants in common among siblings or more distant relatives. All must agree to make changes or involve the courts to do so. Some families set up iron-clad trusts that require ownership among family members for the next few generations. While the idea of requiring land ownership makes sense in some cases for a variety of reasons, it doesn’t for others. This is especially true when you have a farming heir or other children or grandchildren that aren’t particularly interested in being owners of a farm.

Now, I am not saying that the above solutions don’t work for some families. However, consider creating a structure with more flexibility if you want to encourage your children and grandchildren to be landowners while allowing the farming heir to farm, or not forcing land ownership. Protecting your legacy and encouraging generational land ownership is possible — just leave an “escape hatch” for those that don’t want to be landowners. When I think about an escape hatch in legal terms in this situation, I think about a buy-sell agreement, a first right of refusal, an option to purchase or other written document that gives family members a set of directions when they no longer want to be landowners or their lives have taken them in a different direction.

Solutions that encourage, not mandate

Many options encourage ownership, but allow for a buyout by other family members if necessary. Recorded first rights of refusal, option agreements, language in your will or trusts, ownership by a trust for a period of time and business buy-sells are all good options.

Let’s talk through an example on the business side: Let’s say your farm operation uses a business entity. Like most business owners, you set up the entity without having an attorney draft the other documents you might need. Examples include an operating agreement or any direction on how subsequent owners of the entity will operate the company. While you are cleaning things up, one solution is to add a “buy-sell agreement.”

In its simplest form, a buy-sell agreement is a contract that creates an option for one business owner to buy all of part of the business when a triggering event happens — such as death, divorce or even a disability. Several ways exist to structure such an agreement. One option is to have a stand-alone agreement between the owners of the company, and another is to include it in the governing documents of your business, such as in an operating agreement or bylaws.

The structure depends on your goals. For example, you may want to leave the units of a limited liability company (LLC) to your children equally, but give them a way to buy a sibling out that no longer wants to be a part of the business. One way to handle this is to let the company have the first option to purchase the units of the child that wants to exit. The remaining siblings can vote.

If the company does not want to purchase the units, then there may be a second option for individuals to buy the units. The important thing is to have a mechanism in place to predetermine the price and how a buy-out would work. Perhaps if one child wants to sell, they must first offer their units back at 80% of fair market value based upon an appraisal done at the time they wish to sell. The options are endless.

Some of you may think it’s too late to plan. Don’t worry. It’s never too late to plan, especially when everyone has the same goal in mind.

Most often, family members have the same goal; they want to honor their ancestors and their hard work and do not intend to feud about land ownership. The goal is to make it simpler to own land together but leave some flexibility for unforeseen events.

Herbold-Swalwell is an attorney with Wickham & Geadelmann PLLC.

About the Author(s)

Erin Herbold-Swalwell

Erin Herbold-Swalwell is an attorney with Wickham & Geadelmann PLLC.

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