Dividing some assets is a simple matter of math. Other assets, however, seem to pose as large a problem as the baby in the legend of King Solomon. Family farms, like that infant, are often both beloved and challenging to divide.
For those who have poured years of work into a family farm or similar land-based business, the question of how to pass it on may seem a matter of intense emotion rather than of quotients and remainders. But with creative estate planning, inheritance need not be a matter of choosing one heir over others or of liquidating an endeavor you would rather leave intact.
You may want to consider a variety of strategies, but the crucial point is that an imperfect plan is immeasurably superior to no plan. Following a "wait-and-see" approach means that any unexpected turn could result in an outcome neither you nor your heirs would prefer. Even if your plan isn't ideal, you can revisit and change it as you work out something better. In the meantime, don't leave your farm's future to chance. Your succession plan should be thorough and exist in writing, not merely in your mind. It should also take a form likely to hold up under legal scrutiny.
Avoid the trap of imagining that siblings who get along well will be able to sort out how to divide your property after your death. None of your heirs will be in a position to serve as an impartial judge, and even if they do not end up disputing the way to divide the property, you will have left them a large administrative (and potential tax) burden at a time when they are grieving and dealing with the rest of your estate. You should certainly involve them in your plans, but the ultimate responsibility is yours.
The solution that is best for you will depend on the variables at play, including the number of heirs you wish to include and the nature of the property you wish to pass down. Your heirs may have different levels of ability or interest that will dictate different roles in passing along a business. They may have had different levels of involvement in the past reflecting these abilities and interests, too. As with other estate-planning concerns, it makes sense to differentiate between fairness and equality when dividing the farm.
The largest decision will be whether to liquidate the farm and divide the proceeds among your heirs, or to transfer the working farm, including the ownership, management and labor components of the enterprise. The former does raise its own estate-planning issues, but is comparatively simple. For many, however, it is likely to be the more emotionally wrenching choice. Further, if one of your heirs has already invested significant time or effort in working the property, he or she may believe that selling the farm just to simplify the process of dividing it is ultimately unfair.
If you divide the farm equally without liquidating it, more questions arise, especially if you have multiple heirs. Will the child or children working on the farm have to pay rent to siblings who have other careers? If the child working on the farm is outnumbered by siblings who don't, could the majority outvote him or her on important decisions about the farm's future? If you would prefer to give the entire farm to one child and give assets of equal value to the others, how will "equal value" be determined? If you plan to divide a business or business interest that needs active management, consider the time and energy it will take to maintain the entity's value; an interest in the farm is certainly valuable, but its value will be maintained through hard work, whereas liquid assets come with fewer strings.
Remember also that children or family members who have worked on the farm or with the property are likely to have different expectations than heirs who have not been involved to this point. An adult child who has stayed put and worked on your farm may very well depend on it for his or her future livelihood. If your farm is not currently profitable, it is also important to have a plan to address the shortfall during and after the transfer. Consider whether you are open to financing capital improvements as part of the succession plan.
What if none of your children currently works on the farm? It is important to build in time to teach your heirs how to manage what you plan to give them if they have not been a part of the farm's operation. If none of your children has the capacity for or interest in taking over day-to-day operations, even with time for training, you must accept this; you may want to transfer your farm as a working interest to someone else, structuring some amount of the profits to flow back to your family.
Whoever you choose, identify your successor or successors, if you plan to transfer ownership of the operation. Have plans for transition to them upon your retirement, but also in case of your unanticipated incapacity or death, so all three scenarios have corresponding plans. Also take the time to discuss your plans with those affected, both your heirs and others with substantial stakes in the farm, making sure they understand your intentions and the planned timeline for the transfer of responsibility. If you have children and plan to transfer the farm to someone else, you do not want it to come as a surprise.
You will need to plan your ideal timeline for the transfer. Assess how long you would like to keep working (assuming you are able) and what your income sources will be once you retire. Do you want to continue working on the farm after you are no longer its owner? Will you be able to step back from the final decision-making if so, leaving it to your successor? Or would you prefer to take a more traditional, leisurely retirement? Making an informed choice about how to divide the farm will also require a thorough and up-to-date understanding of your overall financial situation and estate plan, so the transfer can work in harmony with your other constraints and goals.
Estate planning is always complicated, and especially so with a farm or other enterprise. You will need a financial planner and an attorney with experience in succession planning issues specific to farms or other small business interests. If you are considering restructuring the business to accommodate multiple owners, you may want to seek out a management consultant with experience in farming. Unexpected life events are not the only reason to start your planning early. Giving yourself time to deal with estate-planning issues allows for in-depth conversations with professionals and your family, in which you can respond to their concerns and advice.
Once you know what you want to happen, the professionals you hire can help you understand the most effective way to go about structuring the division and transfer. There are many options, with pros and cons. Often, there is no one right answer. Here are a few factors you may wish to take into account:
- Minimizing tax liability for you and your heirs
- Risk management and protection from creditors
- How joint owners or partners will share management and/or profits
- If and how profits will flow to heirs not involved in the farm's daily operation
- State law requirements and constraints
All of these factors and more may influence what planning solution is right for you. As with any business succession plan or estate plan, remember that making the plan is not a one-time event. Instead, it should be a process, in which you respond to changes and new information by updating your plans as necessary.
The discussions and choices involved in dividing a family farm or other family business will not be easy, but they are essential. The sooner you begin, the longer you will have to work out a plan that will be best for you and your family.
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About Rebecca Pavese
Rebecca Pavese, CPA, is a client service manager of Palisades Hudson Financial Group LLC. Based in the Atlanta office since 2008, she supervises the delivery of income tax planning and return preparation services to approximately 130 clients nationwide.
Rebecca joined Palisades Hudson in 2000 as an associate in our tax and financial planning practice in New York, after graduating from the University of Pittsburgh with a B.S. in business administration. She has worked extensively in our tax, financial accounting and estate planning and administration practices. She also supervises Palisades Hudson's accounting and administration services for estates and trusts, as well as accounting services for a complex oil and gas investment partnership.