5 tools to facilitate farm splitting

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In last month’s column, I asked if you could afford to start over and buy all the land, livestock and machinery on your farm at today’s market prices.

If not, ask if it is fair to expect your farm sons or daughters to do this when they buy farm goods for their siblings the day after your or your funeral. of your spouse.

Unfortunately, farms rarely generate enough money to make these purchases possible. However, you have some options to make this process work for the heirs who will take over the farm.

This column discusses five tools to consider when creating a farm succession plan that includes on-farm and off-farm heirs. These can help the farm stay with the family member who manages the day-to-day operation:

1. Cash rules. Cash can be the great equalizer when dividing parents’ assets among siblings.

Life insurance, retirement accounts or other liquid assets give parents the option of leaving something other than physical farm assets to non-farm heirs. However, farm businesses often have little additional cash flow because their wealth is tied to long-term assets.

To address this cash flow shortage, parents who are insurable can purchase life insurance and name off-farm heirs as beneficiaries. This is a great strategy for sending money to heirs who are not actively involved in the farm. The farm would then revert to the successor.

For the successor who knows that the farm will be shared equally among all siblings, he may consider purchasing life insurance on his parents. While it may sound like a morbid concept – buying life insurance for your parents – the policy can provide the money to buy out the siblings with a lump sum when the parents pass away.

2. Purchase-sale agreements. Parents can work with the successor to enter into a buy-sell agreement during their lifetime. The deal can include favorable terms that give the next generation the best chance for success on the farm. These agreements can have various characteristics to meet the needs of a family.

For example, an agreement may say to sell the farm immediately or at a later date. In these agreements, the selling price of a farm does not have to be full market value, and the family can structure the sale in installments to limit tax consequences.

3. First option to lease or buy. In the event of an equal division of land between siblings, the heir to the farm may have the first option of renting or buying the shares of his siblings. Again, parents can set favorable rental or purchase terms, such as specific payments and interest that a successor would pay over a number of years. This prevents the successor from making an immediate lump sum payment. In addition, parents can often set a purchase price or more favorable terms for the successor than what the siblings might demand.

4. Organized business entity. Parents can choose to create a legal business entity, such as an LLC or a corporation, and allow all siblings to share ownership of the business. In this case, the successor would operate the business on behalf of the other members of the business. He or she can also receive a controlling interest. The terms of buying or selling an interest would likely be included.

5. Separate land ownership from farming business. Separating the farming business from ownership of the land allows the parents and the successor to form a legal entity to jointly operate the farming business. This entity may own assets such as livestock and machinery. Land can be owned separately and shared among all siblings.

When the parents died, the heir to the farm would control the business and all the siblings would share the land. The parents’ estate plan may give the successor the right to lease the land for a guaranteed number of years, or the plan could allow the successor to have an initial lease or purchase option.

Make a plan

Regardless of how you choose to distribute the assets among multiple heirs, you need to plan how the children can cash out their shares.

If you want your kids to get together for Christmas dinner after you’re gone, do what you can now to make succession decisions and keep the peace. Don’t let your children make these decisions on their own.

Tucker is a business specialist and estate planner at the University of Missouri Extension. He can be contacted at [email protected] or 417-326-4916.

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