Do you have a will? Do your parents or grandparents? I assure you they do even if they didn’t draft it, the state will make one and decide what to do with their assets. But is just a will good enough? Not even close. I don’t care how old you are but you will need to decide what to do with your assets. You will have to choose to be Fair or Equal because very rarely are Fair and Equal the same thing.
It is not unusual for older generations to decide to spilt things evenly between their kids. That quarter of land gets divided among three siblings. Maybe three siblings have to divide up the acreage and decided what to do with it. Sounds fair right? Well, I will argue that it’s equal but not fair and often leaving things like a piece of land to a family member who has worked in town their entire adult life can have significant consequences for them and family.
Fair and equal are very rarely the same thing.
Often what happens with farming is some of the siblings move away while others come back and work on the farm. They have been building their livelihood with the farm and taking over for the parents slowly. What happens when the parents die and things are supposed to get split? All of a sudden instead of sharing ownership with someone who trusted them to do everything they now have other family members who get an opinion. What happens if these other family members want to sell off their portion? What does that mean for the farm? By splitting up all assets equally, it can very quickly ruin the farm and the livelihood of another sibling. While I’m sure that is never the intention, it is very often the outcome.
Now, what about Estate Taxes? Believe it or not, America has always had relatively high estate taxes. A lot of it has a lot to do with the American dream that you can achieve anything. Old money ran Europe, and they didn’t want that to happen here. While estate taxes can quickly change percentages and amounts they will never go away. Whether you work in the city or for the farm you are going to have to pay them when you inherit anything. Can the family afford to pay the tax? Do they even have any idea how much tax it is going to be or are they going to have to sell assets to pay it?
Say there is a Sibling A that has a well-paying job in a city Then there is another one, Sibling B, who has spent their life at a lower paying job like a minister, missionary, or even teacher. The last sibling, Sibling C, went back to the farm and slowly took it over. What is going to happen when the sibling B with the low paying job inherits their portion? Can they pay the taxes? Have they been so removed from the farming world that they don’t even know that it’s an expense they are going to have? Sibling B often gets put into a position they need to sell off their inheritance, Can sibling A & C buy sibling B out? Maybe sibling C the one who has been farming gets put into the position that they need to buy everything. Sibling A and B want to sell. Can Sibling C, the farmer, afford it? What is it going to do to the farming operation if it does happen?
Are you treating the Farm as a Business?
Maybe keeping the farm in the family is the most important part so within the estate plan it states that Sibling C has first option to buy Siblings A & B’s portion upon death. Maybe there needs to be a plan that Sibling C buys the farm over a ten-year time frame and pays back siblings A & B, or maybe Sibling C has already bought most of it, and Sibling A & B are just going to be left money. These decisions are often not made which can make things a disaster down the road.
The farm is not always seen as a business being passed down generation to generations. Instead, people either see the sentimental value or the monetary value. I believe whoever owns it can ultimately make the plan, but I do think all family members need to be told. After all, that plan will have a lasting effect. This can eliminate many feelings of resentment afterward while also preparing everyone for what their expenses maybe down the road. It is easier for everyone in the family if there is a plan in place and they know about it. This way future generations can make plans for how to successfully transfer assets or save money for future situations. Things that are much better planned for instead of trying to figure it out last minute. Especially when you have an end of the year tax deadline approaching.
Fair and equal are very rarely the same thing. It is important to have an estate plan. It is also important to make sure everyone understands the reasoning behind it to keep family peace.
Missed Part 1? Don’t worry I’ve got you covered! All you need to do is Click! Can your Farm make it to the Next Generation? Estate Planning Part 1