Fair Versus Equal —Treating Farming and Non-Farming Children Equitably

Two Farmers in Field
04 Oct 2021

In a farming family, there are often varying levels of involvement in which children participate in the family farm. The complexity of a farm transition creates challenges in treating your farming and non-farming children equally when working through your transition and estate plans. Treating your heirs fairly is to treat them according to their needs, not treating them exactly the same. 

When transitioning a farm, it can be difficult to balance the desire to split your assets equally while also considering the continued viability of the operation. Strategic division of assets is a crucial component of a successful transition plan. The involvement of the children in the operation needs to be recognized and considered. Is the child heavily involved in the day-to-day activities of the farm? Is the child capable of managing the business aspects of the farm? Does the child have financial stability?  These are just a few of the questions one may ask themselves as they are working through a plan for business continuity.  

Identifying assets that do not affect the continuation of the farm operation are easy to pass to the non-farming children, but often a majority of estates are made up of assets needed for the farm, such as land, machinery and equipment, farm buildings, and storage facilities. Assets often used for equalization of estate distributions are retirement accounts, other investments, and life insurance. If there is not a significant amount of non-farm assets and there is a strong desire to leave each child an equal amount of your estate, there should be very specific buyout provisions if you want the farming child to end up owning the assets. 

Good record keeping and tracking of what has been already purchased by the junior farmer will ensure that if the senior farmer dies, the child does not have to re-purchase the assets from their siblings according to the buyout provisions. Many times, entities or trusts can be used to ensure the buyout provisions are honored. Specific provisions for valuation and a buy-out timeline can help the farmer keep the farm cash flow in check. When considering your transition or estate plan, you should run your balance sheet through the plan to make sure the buy-out is affordable given the size of the estate and farm.

Farmers and ranchers are arguably some of the hardest working people. Many work their whole lives in hopes to leave a legacy for generations to come. Please remember that your children are not entitled to receive inheritance - they may have to work for what they receive just as you did. Therefore, consideration may be given to the sweat equity put into the farm by each of the children. If you put a line item on an estate distribution break down labeled “sweat equity”, the equality amongst the children’s estate share can shift dramatically very quickly. 

Communication of why your plan is the way it is may be the ticket to successfully making your children feel they have been treated fairly. Not all your children need to like your plan, but they need to learn to accept and appreciate the legacy you want to leave. There is no better way of helping them do that than allowing them to hear your wishes directly from you.

 
Bobbi Sondreal
Written By: Bobbi Sondreal
Succession and Retirement Planning Consultant