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

April 10, 2018

Family farmers face a difficult issue of passing on the farm if there are both on-farm and off-farm heirs. A family farm is a business but also about family. Doing what’s best for both farm and family requires making difficult decisions and sometimes rocking the boat.

Most parents try to treat their children equally when it comes to financial support, be it birthday gifts or help with a down payment on a home. But if farm assets are distributed equally to on-farm and off-farm heirs, consequences can be disastrous for both the farm and family.

As an example, a farm is operated as a corporation. There is one on-farm heir and two off-farm heirs. If stock in the corporation is given equally to all three heirs, off-farm heirs will be able to outvote the on-farm heir. Even if the corporation is structured so the on-farm heir has voting control, there will likely still be problems. That will happen especially if the on-farm heir wants to use excess cash to pay off debt, purchase equipment and do other things to improve the farm. Off-farm heirs will probably either want the off-farm heir to purchase their shares or receive a return on their “investment” in the form of cash distributions from the corporation. Disagreement is likely about expenditures the on-farm heir makes, including compensation and benefits received by the on-farm heir.

Parents may have treated all their heirs equally but it has resulted in family conflict, hurt feelings and perhaps even loss of the farm.

Several things can be done in estate planning to allow an on-farm heir to continue farming with as little conflict as possible.

Designate farm assets for on-farm heir
Determine what assets represent core assets an on-farm heir needs to continue farming. Develop a plan to safeguard those assets for the on-farm heir. Control of the farm operation and ownership of assets key to the operation — such as equipment, livestock, barns and other improvements — should be transferred to only the on-farm heir. Ideally the transfer would be made by sale or a gift during the parents’ lifetime, although it can also be completed on a parent’s death through his or her estate plan. While a sale can provide parents with cash to use in retirement and other assets to give off-farm heirs at death, a sale may not be the best option because of tax consequences and cash-flow needs.

Handle land differently
If there is significant land involved, parents may not want to leave all the land to the on-farm heir because he would be able to sell it at any time, potentially resulting in a windfall which the parents never intended for one child. Plus a parent may want to give other heirs access to the land for recreation or other uses. They might want to make the land available to future generations who want to farm but who are not children or grandchildren of the on-farm heir. Or the parents might want to make sure the land stays in the family even when there are no family members actively farming it any longer.

A combination of trusts, Limited Liability Companies, options and long-term leases can be used to give an on-farm heir access to the land for farming while keeping the land in the family and allowing off-farm heirs to benefit if the land is eventually sold.

Leave non-farm assets to off-farm heirs
Non-farm assets should be left to off-farm heirs when parents die instead of giving them an interest in farm assets. Of course the assets may be needed to fund the parents’ retirement. Because there will be uncertainty as to what assets will be left for off-farm heirs, life insurance — for example a second-to-die policy for a married couple — is sometimes recommended as an asset to leave for off-farm heirs.

Fair doesn’t mean equal
The goal is to be fair to all heirs, not treat them the same.  Inheritance should be seen as a gift, not a guarantee.

Parents should explain their farm-succession plan to their heirs and reasons behind it. Off-farm heirs may not fully agree with the plan but at least they will hear the reasoning behind it and know it reflects their parents’ wishes. They will also hopefully understand it has nothing to do with how they are valued within the family.

Parents should remind off-farm heirs of sacrifices made by the on-farm heir along with the stress, long hours and generally low pay in farming, as well as forgone off-farm opportunities. Off-farm heirs might also be reminded that as part of a farm family they are fortunate, especially in these times, that there is an on-farm heir willing to continue the family’s farming legacy.

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

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