What is in this article?:
- Farm Transition Planning: Focus on Long-Term Farm Needs
- Fractionalizing the farm
Fractionalizing the farm
Usually, fractionalizing a farm is not a good idea. When you cut up a pie and continue to cut it up, the pie eventually gets so small that no one can enjoy it. The same is true with a farm. It can be divided so much over generations that it is no longer viable or beneficial to anyone.
Equal distribution of the farm to four children means splitting up ownership, control and the farm’s income.
- Can the farm survive?
- If not, how will that affect the farm’s ability to support those who are caring for it? Who will be in charge? Who will make critical decisions on its care?
Another common choice farm operators make is consolidating ownership of the land and operations with the active children. But, that may mean that the non-active children receive less, maybe much less than an equal share of the farm operator’s estate. There are alternatives that can help make the distribution more “equitable” and ease the concerns of inequitable treatment among the children.
One way to compensate children who will not receive a share of the farm is a buy-sell agreement funded by life insurance. The farm operator can buy a life insurance policy, the proceeds of which will allow the children who will operate the farm to purchase the remaining shares of the farm from the children who will not operate it. This compensates them financially for being “left out” of the farm operation.
The focus should be maintaining the farm’s economic integrity and getting the right caretakers in place to continue the success of your farm.
But is focusing on the two active sons the right choice in this case? If you can step back from personalities and preconceived notions and make succession decisions based on what’s best for the continued success of the farm, this farm operator may need to examine other alternatives.
For example, the best decision might be allowing the business major to run the business side of the farm and the oldest, most experienced son to manage the field operations. Birth order does not always indicate which child has the capacity and skills to run the increasingly complex financial and business operation that modern farming has become. Our farm operator’s preconceived notion may be faulty.
While planning for the future success of your operation, you and your family may have to face tough decisions that can be contentious. The best approach is to confront the issues, not avoid them. The decisions are not easy, but doing the right thing seldom is. In the end, the long-term needs of the farm should be the primary priority to increase the odds of success for the transition and the ability of your farm to provide for your family into the future.
Donald G Schreiber, J.D., CLU, ChFC is technical director of advanced sales for Nationwide Financial. He is a registered representative of Nationwide Investment Services Corporation, member FINRA.