Today’s question should be of special interest to all families in agriculture, where some of the adult children might already have other occupations, perhaps live far away and do not want to — or are unable — to actively be involved in day-to-day operations.
What happens to the farm when Mom and Dad die? How do you keep the business running and at the same time let the children share in its value, obtaining their percentage of the estate?
When not asked, it is a question which has been the direct cause of enormous financial and relationship loss in many farming families.
For an answer, we turned to Linda Monje of Bakersfield, a lawyer/CPA who has worked with ag families for many years.
In agriculture, money to pay heirs often in short supply
“In agriculture, cash is usually in very short supply,” Monje began. “It is rare for a family farm to have enough cash on hand to immediately pay all family members their present value and at the same time to continue to operate profitably. So, unless the farm is sold, the challenge is how to keep it operating — and pay something appropriate and fair to siblings who will not be active in the business.
“Clearly, an agricultural business has greater value when it is being operated and less when you sell off equipment and land. A working farm creates a livelihood for those running it, provides employment and injects money back into the community,” she adds.
“But when a son or daughter are designated to take over, and have to pay other family members their share, unless carefully planned, you could see destruction of both business and family harmony,” she stressed.
“If Bob and his wife will be operating the farm, and expect to earn a living for years to come, do you account for their income, and add it to the amount of money the farm is worth, and then require further payments to the other children? Or do you realize they accepted the risks of running a business, and therefore should get all of the rewards, if there are any?
“Do we put Bob in a position of working hard to keep the family farm successful, and then years later, force him to buy it back from his brothers and sisters who have contributed nothing? Jealousy and misunderstanding will result if these issues are not addressed.
“The most trying times for farming families can be the realities of a complicated inheritance.
“Parents need to address these issues while they are mentally sharp and able to involve their children in these important decisions,” she strongly recommends.
Two approaches for resolution
“The easiest approach with a farm that has several parcels of land is to simply give some to the children who will not stay on the farm.
“The remaining land belongs to those siblings who will continue the farming business. This requires adequate amounts of land to accommodate such a division and is an excellent solution when the children all recognize that brothers Bob and Rick have always helped dad run the farm and want to follow in his footsteps.
“A commonly used alternative is a life insurance policy on a parent, such as:
1) A whole life policy of insurance on, we will say, mother, is purchased by the family members who plan to run the farm.
2) The beneficiaries of the policy are those children who are not actively involved in business operations.
3) Often, there will also be a cash-equalizing payment of some amount.
4) The children who are running the farm must keep the policy paid current. It is always a good idea to be sure that a parent — who is mentally sound — is involved in at least being aware of payments being made.
“The benefits of this kind of an estate resolution can be significant, eliminating family discontent, and when mom dies, frequently paying out far more money tax free to the non-operating family members than if they had taken their percentage at the time dad died.”
Need cash now? Policy loans are possible, but ...
“What this means is that the non-farming children own the policy and will receive payment when mom dies.
“It also means they have the ability of taking a loan against the policy, or cashing the entire policy in, or part of it,” notes Monje, while asking an important question:
“But what happens if they do? Will previously hidden, jealousy-steeped issues surface?”
They did for Hanford readers. Their story, next time.
Beaver practices law in Bakersfield and welcomes comments and questions from readers, which may be faxed to him at (661) 323-7993 or emailed to him at email@example.com.