By Troy Schneider
Many of you have heard the adage while attending succession planning conferences: “Fair is not equal.” But is leaving everything you own to your farm children and nothing to your nonfarm children always fair? If that is not fair either, what is fair?
In the 1964 U.S. Supreme Court case Jacobellis v. Ohio, the court was asked to define whether certain material was pornography or whether it was not obscene and therefore protected free speech. When asked to define the difference, Justice Potter Stewart famously wrote: “I know it when I see it.” Certainly, fairness is similar — something that is very subjective and lacks clearly defined parameters. Often, what happens during the farm succession planning process is that the parties (the parents, especially) get bogged down in trying to figure out what fairness means, and the process then never starts or fails to continue.
The purpose of this article is not to tell you what is fair; that is for each of you to figure out. What this article hopes to do is provide you some points to consider as you determine what is fair in your farm estate and succession plan.
Succession planning is the transfer of both management and ownership. Even if you are a young couple with small children, you should consider what your farm transfer plan is. For example, if all your children are very young, in the event of your deaths, perhaps a sale of the farm’s livestock, machinery and equipment but retention of the farmland in a trust is possible. If your children are teenagers and it appears one or more children would like to farm, in event of death, perhaps retention of the farm assets in a trust is possible until one or more children “earn” ownership in the farm assets.
Remember, things change
Farm succession planning is navigational, meaning it often changes courses. In addition, farm succession planning is a process and a journey, not a destination. As circumstances change, the farm succession plan should change as well. Consider some of the following circumstances that might change a farm succession plan:
- When the plan started, the farm child had been working at the farm for five years. Now, the farm child has been working at the farm for 25 years for below-market wages.
- Parents used to help on the farm. Parents are now slowing down and spending less time on the farm.
- The value of the parents’ nonfarm assets that were earmarked for the nonfarm kids only has increased in value dramatically. The parents have not been providing a great deal of labor for the farm but still receive a family living draw.
- The farm has had several years of difficult cropping seasons with low commodity prices.
- The next-door farm came up for sale and the farm child bought it, stretching equity.
Establish guiding principles
Too often, in farm succession plans the first questions people ask are: “What are we going to do?” or “Will we start a limited liability company or a corporation?” However, most farm succession plans are successful only if the parties are in basic agreement as to some guiding principles. Most families working on farm succession planning have the following same objectives:
- Provide financial security for parents.
- Maintain a viable farm.
- Minimize taxes.
- Protect assets in the event of long-term care.
- Provide nonfarm children a sufficient and fair inheritance.
During the farm succession planning process, the details of each of these objectives need to be fully explored. For example, what does adequate financial security for the parents look like specifically? How much debt can the farm have for it to still be viable? This is where the “rubber hits the road” when it comes to exploring the needs and objectives of the parties.
Communicate the plan
After the parents decide what they are going to do, they need to explain to their children what they are doing and why they are doing it. However, the details as to “what we are doing” will depend upon the age and personalities of the parents and children.
A farm succession plan should always address the events of death, disability or divorce. However, a farm succession plan should also address the issue of disagreement. To avoid disagreement, the “rules of the game” should be discussed — in essence, how decisions will be made.
Formal agreements vital
It is important that your farm succession planning documents be in writing. Ambiguity often leads to disputes. Well-written documents remove that ambiguity. In addition, at the very least, parents should have powers of attorney and a will or living trust. Even though parents may not have completely decided what they believe is fair, they can decide who will make their farm decisions for them if they are unable to do so.
There is no easy way to deal with fairness in farm succession planning. However, it’s important to put a plan in place that can be modified to get to a point where fairness is achieved.
Schneider is a partner in the agricultural law firm of Twohig, Rietbrock, Schneider and Halbach. Call him at 920-849-4999.