Farmers need to have the right legal documents in place to ensure that the ownership of their assets pass to the next generation, as desired. It can even determine whether a family farm stays in the family. There are several mistakes that estate planning attorneys frequently see with their clients.
The Minnesota Farm Guide, in the recent article, “Four common mistakes in estate and succession planning,” says one mistake is having no estate or farm succession planning at all. Many families don’t do anything. Experienced estate planning attorneys see many difficult situations where individuals have made mistakes in their planning, leaving the successors to pay the price for those unforeseen consequences.
In farm families, it’s common for one or many children to stay and work the farm with the parents, while the other kids leave to start their own careers. The parents must try to figure out a fair plan for the other kids, while allowing the farming child to have the continued opportunity to farm the family land.
A farmer’s assets usually consist of farm equipment, machinery, grain inventory, and the land. If they want the child who’s farming to keep farming, they may decide to create a structure to get that child the machinery and equipment. However, they can get stuck because if they also want to give them the land, there’s nothing left to give the non-farming children.
Another issue is waiting too long to start estate or farm succession planning. It’s beneficial to everyone to begin early. A parent can buy a life insurance policy to pay out to the non-farming children with the value of the policy equal to the assets being passed on. If it is set up correctly, the policy’s proceeds can also be used to pay any estate tax. Waiting to start planning, makes it too difficult or too expensive to get such insurance.
A third mistake is not working with an attorney who specializes in estate and succession planning.
Finally, it’s a mistake to think the only way to give the farming children the opportunity to continue to farm would be to not only give them all of the farm equipment, machinery, and inventory but also all the farmland. This would be very unfair to the other children.
If you work with an estate planning attorney, you can devise a strategy that will make it easy for the farming child to continue farming and carry on the legacy, but also to be fair to all the children. This may involve transferring land ownership into a partnership, which then governs how the land is managed, rented, and sold, as well as the way in which partnership interests can be sold. The beneficiaries don’t get land ownership outright, only an interest in the partnership that owns the land. This way all the children get a benefit from the land, and the farming child can continue to farm.
Reference: The Minnesota Farm Guide (August 2, 2017) “Four common mistakes in estate and succession planning”