The Three Sons and the 980 Acres: A farm transfer case study

From a PFI member:

My father is 85 and my mother is 75, and they have farmed their entire adult lives. My father has 600 acres of farmland in a living trust from his parents Assuming my father dies first, it will pass to my mother. My father and mother also own an additional 300 acres free and clear, and my father and my brother Stan own another 80 acres free and clear.

The average farmland value in Wright County right now is $10,600 an acre. So we are talking about land worth roughly over $10.4 million dollars at today’s prices, all to be divided up between my two brothers, Stan and Curt, and me.

Of the 600 acres in the living trust, Stan, Curt and I will each inherit one-third of the value of the trust, and the trust will be dissolved when both my parents are gone. In addition, the three of us will each inherit 100 acres of the additional farmland.

Stan is co-owner with my father on the additional 80 acres because he has been farming with Dad since he was 15 years old. For 25 years now he has wanted to be a farmer, and he gave every spare moment for all those years helping on the farm. My parents recognized this contribution through these 80 acres.

The rest of my parents’ assets will be divided equally among the three sons.

When Stan was 18, he also started working at a manufacturing plant as well. He owns his own cattle, which he runs on my parents’ land rent-free.

Curt has helped with planting and harvest. He enjoys farming but has a comfortable off-farm job. I have an off-farm job but have started my own small poultry operation that I hope to expand on the 40 acres I live on.

Stan owns his own home, and Curt and I live on acreages that are part of the land my folks own. As far as I know Stan has always been paid in commodities for laboring on the farm. I know this year, that payment will be commodities worth $75,000. I’ve started to do most of the bookkeeping, and get a salary for that. Curt gets a salary for helping with the planting and harvest and also for fixing things on the farm.

Five years ago, my father developed congestive heart failure and became physically unable to keep up the farm. Yet he still gets mad if anyone brings up what will happen when he’s gone. In his mind, Dad is still “boss” and Stan is the laborer.

In reality, Mom has always been in charge of the farm. Our mom is very resourceful. She has always done the grain marketing. She’s a good investor too, so she and my dad have additional assets, I am not sure how much. They also have taken care of life insurance and long-term care insurance; again, I don’t know how much.

Through the years, Stan has always been hankering to buy or rent more farmland. Mom is more interested in diversifying the enterprises on our existing farmland; she thinks my poultry operation is a good idea. She talks guardedly about transition of the business with my father, but there has not been a lot of progress. She has started talking to us kids more, especially me, about the future of our farm.

My parents’ assumption is that the land will not be sold when we inherit it. What we have been trying to do the last couple years is figure out if we should form a corporation so that Curt, Stan and I will get experience working together on the farm enterprises while Mom is still alive. The land wouldn’t be held jointly in the corporation; the corporation would be for the planting, harvesting, and marketing of grain. It would really please her if the three of us were working together. We were all willing to do that and had even started deciding our roles and job descriptions. But then our accountant told us my parents need to figure out who is going to get which parcels of land first. So that’s where we are. (I’d like a second opinion about if this is indeed, the best way to proceed.) I definitely want the 40 acres I live on. And Curt wants the 200 acres he lives on.

Stan, Curt, and I aren’t sure we want to work together, but we aren’t opposed to it either. We understand that our skills complement each other. We do have different ideas, though, about the farm. I just want to work the 40 acres around my acreage, and then rent to Stan the rest of the land I will inherit at full market value. Curt would like to farm the land he inherits himself, sharing equipment with Stan.

I worry this will all fall apart, though, because Stan won’t be able to support his family of five on 380 acres of conventional corn and soybeans. I’m also concerned about his money management skills, and his wife, who isn’t very supportive of his farming. I could see her wanting to leave the farm in the future.No matter how the land is divided, I am afraid that Stan will end up leaning on my other brother and me to keep him farming (e.g. reduced rent). Because of this, I wonder if he should be granted more land. I think this needs to be addressed while my parents are living to prevent any sort of dependency forming later.

Is it enough for Stan to get 380 acres while Curt and I get 300 acres? Should Stan get even more land for all of his work through the years?

If Stan receives more land than is already designated for him, should Curt and I be equally compensated through life insurance proceeds, etc?

Should my parents make sure that it is clear which parcels go to whom in their will or let us children work it out among ourselves after they are gone? This will involve trading.

Are there tax issues to consider in deciding who gets which parcel of land “before” vs. “after” the estate is settled? What are these tax issues?

What about the corporation—should Stan, Curt and I encourage its formation?

As far as I’m concerned, my wish for the future is to have harmony among us, not the terrible fighting I hear of so often regarding estates. When I am a landowner of any sort, I will feel privileged and blessed. I have many, many dreams! I support small, diverse farms that feed me, my family, and my community. Forty acres to steward would be a godsend and a handful. Forty acres is the bottom line for me; I’ve made that much clear.

Response:

Kudos to this PFI member for being willing to share his story! Here are some initial comments from Margaret Smith, Value-Added Ag Extension Specialist and Co-coordinator of the Iowa Farm Transitions and Beginning Farmer Working Group at Iowa State University: 

Although the author’s parents have long-term health care insurance, is it enough? If the amount carried on one or both parents is exhausted in the future, what are the provisions for generating the needed income from other investments or the land to cover nursing home care costs? Would land need to be sold, or would other investments be available for this need? What parcels could be sold? The family (as all families!) should familiarize themselves with nursing home care costs for planning purposes.

With farmland valued at $10,400,000, the overall estate value is likely over the $10,680,000 limit for a couple ($5,340,000 per person) to pass on without incurring Federal Estate tax. Mother and Dad may want to consider beginning to transferring assets at this time to their children. As long as they maintain adequate assets to provide for themselves, transferring some of those assets will lower the size of their estate. The member responds that his parents have talked about transferring more assets to the three sons; this hasn’t happened yet, however.

Does the family’s existing attorney and accountant have a lot of estate planning experience with large estates? This is important. The family should build an advisory team to work on this estate plan. A different business structure may be needed to help smoothly transfer assets, but this may not be a corporation. This is an issue with several options to explore with a professional estate planner

It might be useful for a third party facilitator to pose questions to all in the family about their “vision for the farm 20 years from now.” Framing this as “vision” is an easier way to pose this to an older generation rather than, “after you are gone.” Select a time frame that pretty much ensures they will be gone, without bluntly stating the inevitable. The member reports: “We should try this. We definitely need to work on our vision for the future.”

Perhaps the three siblings should work together on a business concept. They may not really need a full business plan at this time, though that will eventually be needed. How do they see sharing farm business management, equipment and income? The author brother has laid out his concept above. They should prepare a written concept to share with their parents. This would be particularly useful in helping the parents begin to transfer machinery assets in the near future.

The concerns of the author brother for Stan is commendable. Can they have an open discussion with their parents about increasing the amount of land left to Stan (above the 80 acre “bonus” he co-owns) because of his dedication to the farm and his parents over his adult life? If it is agreeable with both siblings, the parents may agree.

The author and Curt should be clear about what Stan will currently inherit: Just the rental income from the 380 acres that Stan is scheduled to inherit, at a rental rate of $275/A will be $104,500. In addition he should generate farm income from those acres. If he is living on $75,000 /year now, the concern about his income needs in the future may be unfounded. The very real issue about this income generating possibility is that the siblings may not inherit the land for another 20 years, at which time they will likely be in their late 60s or early 70s.

Finally, Mother needs to continue to train the sons on how to market. They can always hire a marketer after she is gone, but they’ll do a better job if they work with her while she is alive.