Are Non-Farming Heirs Entitled to a Farm Inheritance?

As if farming itself weren’t hard enough, now you have to figure out how you are going to get your farm to the next generation. Knowing the options available to you is an important first step in preparing yourself for this process. Establishing your mindset on who should inherit from you and how much is an equally important step.

I’ve heard, “fair isn’t always equal.” In farming, fair is NEVER equal!

Equal means everyone gets the same exact amount. In an estate, that usually means the value of assets of the estate. For example, if a farmer has an estate value of $3 million with 3 children, that would mean that each child receives $1 million when that farmer dies. But who decided that you need to leave your property to your children in equal shares? It turns out that there is no surer way to set your farm up for disaster upon your death than if you leave your assets to your children in equal shares.

In general, we have found that most farmers we work with have a goal for the farm continue to the next generation. Assuming you’ve identified your farm successor, the next challenge is setting that person up for success. In a research study conducted by Oklahoma State University, several transition strategies were assessed for their probability of success[1]. The strategy with the lowest level of success was dividing assets equally among all heirs. This strategy was determined to be so ineffective that it resulted in a 99% probability of failure if all assets are divided equally among all heirs.

Failure of the farm is the default estate plan.

What happens if you don’t have an estate plan in place? The laws of intestacy get to determine how your assets should be divided. These laws require that your assets be divided equally among all your heirs. This means that the default estate plan (no estate plan) for farmers results in a 99% probability of the farm failing after the death of the farmer!

So, what can you do? Well, if your goal is to set the farm up for the next generation, you need to create your own estate plan and not rely on the state’s default estate plan. From there, you should put yourself in the shoes of your farm successor. Would you be able to buy the farm right now? Are you able to add more debt to the farm for the next 20, 30, or even 40 years just to allow you to stay in the same place? Did you receive any discounted purchase prices or preferential inheritances when you acquired the farm? Is your goal to keep the farm at status quo or do you want it to grow? The answers to these questions can help inform your estate planning decisions.

Ultimately, if your goal is to allow the farm to continue to the next generation and beyond with the greatest likelihood of success, you cannot treat your heirs equally. Consider that the price of farmland has grown significantly over the last few years. For example, a farm that might have been valued at $7,000 per acre could now be worth $10,000 – 12,000 per acre (or more!). This change in value has occurred in the span of less than a year in some cases. If you had died during that time, would it be fair for your farm successor to pay an additional $5,000 per acre even when net farm income has remained relatively stable? Even for a 200 acre farm, this would be an additional $1 million that would need to be divided. That’s not sustainable.

What can the farming heir handle?

Instead, farmers should consider what the farm can comfortably sustain. In most cases, your farming heir cannot purchase the farm from the non-farming heirs, even if it were at a discount. But it may be that your farming heir could handle a fixed dollar amount to be distributed to non-farming heirs for a fixed period of time. This approach allows your farming heir to have a defined amount that will allow them to better predict their cash flow. It also eliminates the risk associated with the wild variability of farm prices that we are currently experiencing. Your non-farming heirs will still receive an inheritance, but it will not come at the expense of losing the family farm.

You should consider having a frank and honest conversation with all your children. Everyone has strong emotional ties to the family farm, and often non-farming heirs feel that they are entitled to a piece of it. They are not. And, unfortunately, if the family farm were to be divided among farming heirs and non-farming heirs, research and experience shows that it will, by definition, no longer be a family farm. In that scenario, the most likely outcome is that the farm will be sold.

Non-farming heirs must also accept that “fair market value” means the price that a non-family member would pay for the farm in an open market. Again, by definition, the farm stops being a family farm when “fair market value” is the benchmark for valuation. There is no way to arrive at this value that takes into account family farm considerations. The benchmark should instead be based on a family farm value, which is the price you determine will allow the farm to succeed.

You should start or review your estate plan now.

If it has been more than a few years since you reviewed your estate plan, it is likely out of date. The increased value of farm assets and higher interest rates should be reflected in your estate plan. Your farm and your farming heir both need a strong foundation on which to continue the farm into the next generation. Failing to embrace this concept wholeheartedly can result in failure of the farm upon your passing.

We help farmers save and transfer their family farms through estate and succession planning every day. We’ve been doing it for over 50 years.

To learn more about farm succession and estate planning, keep an eye on our Events page located at: https://www.wagnerlegalmn.com/events/.

If you’re ready to start being proactive about your farm succession and estate plan, contact us to get started.

Want to stay informed? Subscribe to our quarterly newsletter for updates.

[1]Reed, Garret, J. 2017. Assessing The Rate of Success of Alternative Farm Transition Strategies. Oklahoma State University. Master’s Thesis.