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Ag-Visor Blog

Who Gets the Farm if There are On-Farm and Off-Farm Heirs?

Authored by Linda M. Danielson
Linda M. Danielson
Attorney
Eau Claire Office

Posted on April 10, 2018
Filed under Ag-Visor

One of the most difficult issues owners of a family farm face is who will get the farm if there are both on-farm and off-farm heirs. The farm is a business but it’s also family, and doing what’s best for both the farm and the family requires difficult decisions be made, even if it means “rocking the boat.”

Many parents try very hard to treat their children equally when it comes to financial support (birthday gifts, a down payment on a home, etc.). However, if farm assets are distributed equally to on-farm heirs and off-farm heirs, the consequences can be disastrous for both the farm and the family!

Let’s say there is a farm operated through a corporation, and there is one on-farm heir and two off-farm heirs. If the stock in the corporation is given equally to all three heirs, the off-farm heirs will be able to outvote the on-farm heir!  Even if the corporation is structured to give all of the voting control to the on-farm heir, there will be problems. The on-farm heir will want to use any excess cash to pay off debt, purchase equipment, and do other things to improve the farm. The off-farm heirs will probably want to either be bought out or receive a return on their “investment” in the form of cash distributions from the corporation. Disagreements about every expenditure the farm makes, including the compensation and benefits paid to the on-farm heir, are likely. The owner may have treated all of the heirs equally, but in a way that leads to family conflict, hard feelings, and perhaps even loss of the farm.

So what should be done to allow the on-farm heirs to continue farming with as little conflict as possible? 

  1. Determine what assets represent the core assets that the on-farm heirs need to continue farming, and develop a plan to get those assets to the on-farm heirs. Control of the farm operation and ownership of the assets that are key to that operation (equipment, livestock, barns, improvements, etc.) should be transferred to the on-farm heirs only. Ideally this transfer would be made by sale or a gift during the owner’s lifetime, although it can also be completed on the owner’s death through the owner’s estate plan. While a sale can provide the owner with cash to use in retirement and assets to give the off-farm heirs at death, a sale may not be the best option because of tax consequences and cash flow needs.
  2. If there is significant land involved, the owner may not want to leave all of the land just to the on-farm heirs as they could sell it at any time, perhaps resulting in an unintended windfall to them. The owner may want to give other heirs access to the land for recreational or other uses, make the land available to future generations who want to farm and who are not descendants of the on-farm heirs, or make sure that the land stays in the family, even when no family members are actively farming it. If that is the case, a combination of trusts, LLCs, options, and long-term leases can be used to provide the on-farm heirs with access to the land for farming, while keeping the land in the family and allowing the off-farm heirs to benefit if the land is eventually sold.
  3. Non-farm assets should be left to the off-farm heirs on the owner’s death instead of giving them an interest in the farm assets. Of course, these assets may be needed to fund the owner’s retirement needs, so there will be uncertainty as to what assets will be left to distribute to the off-farm heirs. Life insurance (for example, a second to die policy for a married couple) is a great asset to leave for the off-farm heirs.

The goal is to be fair to all of the heirs, not to treat them the same. Any inheritance at all should be seen as a gift, not a guarantee. The owner should explain the farm succession plan to the heirs and the reasons behind it. The off-farm heirs may not fully agree with the plan, but at least they will hear the reasoning behind it and know that it reflects the owner’s wishes and has nothing to do with how they are valued within the family. The owner should remind the off-farm heirs of the sacrifices made by the on-farm heirs—the stress, long hours, low pay, forgone off-farm opportunities—and that they are fortunate, especially in these times, that there are on-farm heirs willing to continue the family’s farming legacy.

© 2018 Agri-ViewMadison, WI.  Reprinted with permission.