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Serving: IA
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COMMUNICATE: When putting together a farm succession plan, it’s important to explain your goals to everyone in your family.

Recognize son's contributions

Timely Tips: Transferring ownership of your farm to your farming son requires thoughtful planning.

Editor's note: Each month in Wallaces Farmer, the Timely Tips panel answers questions sent by readers. Members of the panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.

Our son graduated with an ag degree in May 2008 from Iowa State University and works full time on our farm. We added hogs to raising crops after he came home. My wife and I are 60 years old and have two married daughters. They and their spouses have off-farm careers. Our son, age 33 and single, is the youngest of our three children. We’ve talked with our son and he wants to take over our farm when we retire. My wife and I need an estate plan. Clearly, an equal three-way split would not be fair to our son. How do we figure out how to fairly split the estate? How do we account for what our son has already contributed to grow our farm?

Stout: We have attended several farm succession meetings. I suggest you and your son do the same. We attended with my father when I was the younger generation and recently with our son as we try to work to a fair succession to the next generation farming heir.

If you don’t feel you have fairly compensated your son for his “sweat equity” then that could be part of your estate plan. Ideally, he is paid for labor and management all along so that he has a chance to build up equity by purchasing land and putting up livestock facilities. Often this can put a strain on the farm operation financially, so you have to come up with another way to make it right with him.

Ultimately, it would be best if your son has ownership of the land and equipment, so that when you retire, he has the means to keep the farm operation going.

You want to treat your daughters fairly, but equal and fair are two different things. I would recommend you and your son attend the Returning to the Farm seminar Jan. 10-11 and Feb. 14-15 in Ames. 

Other meetings and seminars on this topic can be found elsewhere. The worst thing to do is nothing, so get started now while you still have time, and make sure to include your family so there are no surprises for them down the road.

Miller: There are several ways to do this, but the two options I like best are:

Appraise operation today. Set up a provision in your will that at your death, the two off-farm heirs can buy out the on-farm heir at a price equal to two-thirds of that appraised value. This allows the on-farm heir to make improvements without worrying he will pay for them again at your death. It also allows land appreciation to serve as a form of compensation for that on-farm heir.

Give 1% yearly to heir. Give your on-farm heir 1% of the operation for each year he farms with you; then divide the remainder of the operation by three at your death. Say your son farms with you for 19 years before your death; he automatically gets 19% of the estate. The remaining 81% gets divided between all three heirs, so they each get 27%. This would give your son 46% (27% plus 19%) of the operation, and each daughter would get 27%.

Zhang: Succession planning is very important, and you are at the right stage to start developing the estate plan that is agreeable among all your family members. ISU Extension has several farm succession and estate planning resources. I especially recommend you reach out to the ISU Beginning Farmer Center, which offers educational training and also helps families individually.  

If your son has been working for you for 11 years with no written plan for succession, he is a very trusting family member who should be informed of how he will be treated and compensated for his prior 11 years of commitment, contributions and responsibilities.

Having a trained facilitator help develop an estate plan on how your son might take on more ownership and responsibility is critical to family harmony. The plan should allow for an equitable (not necessarily equal) split of the assets so the son can continue the business.

For example, you could consider arrangements that allow your son to buy out his sisters’ shares at a discounted price. Now is the time to share the parents justification for what might be considered an unfair split by family members including the daughter’s spouses. Sharing this information with everyone now might help avoid future disputes.

Do you need more grain storage?

I have enough storage for all the acres I own, which is about half of what I produce. I’m thinking about building bins to store grain grown on land I don’t own. What do I need to consider?

Plastina: Building grain bins on land you don’t own carries the same risk as building grain bins on your own land, plus litigation or equity loss risks if the lease is terminated and the landowner refuses to compensate you for the investment.

Before considering such a risky investment, evaluate other alternatives for storing grain, such as investing in condominium storage space built by commercial elevators, rent storage space from elevators, or rent on-farm storage space from other farmers or landowners. Each of these choices has advantages and disadvantages related to initial investment, annual operating costs, income tax considerations, amount of time required for grain management, long-term availability of storage space, and marketing flexibility.

A detailed discussion of the alternatives along with a decision tool to compare their associated costs of storage are available as File A2-35 on the Ag Decision Maker website.

Stout: One big consideration would be if you have a long-term lease arrangement on the rented land. Grain storage is a large capital expense so you would want to have it in writing if you are going to build bins for crops from rented land.

Do you have a big enough drying system to handle all the corn from your additional rented acres? If your drying system can’t keep up, then having the extra storage isn’t as much of an advantage. Normally, there is enough carry in the market to justify storing to capture the increased price, which helps pay for the storage. You would want to plan your sales to take advantage of the normal carry to help pay for the additional on-farm storage.

Miller: I am not a big proponent of owning so much bin space that you can store everything you produce. If you have too much storage, it keeps you from selling grain when the market gives you opportunities. I would recommend no more bin space than needed for 60% of what you raise.

If you do decide to build bins for production on land you do not own, make sure you build the bins on your land in a location where they could be rented out or sold off if you lose some of that rented ground. Also, stay conservative with bin height and size. If you need that much extra storage, split it between two bins. It will drive up the cost per bushel slightly, but you won’t have to buy the extra expensive auger to reach to the top.

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