Fair estate planning with on- and off-farm heirs
We are currently going through estate planning on my parents' behalf and also my own.
I would like to know your thoughts on what we are considering. Some of the points I am uncomfortable with, but they may be our best option.
To give you a little background, I am unmarried, one of two sons. My brother, Dan, also unmarried, is not involved in the farming operation. The farm is just my dad and I.
My dad is married to my step-mom, who has a daughter and son who also are not involved in our farming operation.
My question is how do we establish what is fair from the farming perspective to my brother and me?
I have proposed to set a company value or net worth at the time I returned to the farm from college, and anything over that value should be included in my portion of the farm at the time of inheritance.
This process is a little shaky because there are a lot of variables.
Also, my stepbrother and stepsister are not to receive anything from my father's assets or company assets. These are to be passed to my brother and me. There's a marital trust for my stepmom.
M.F. is understandably concerned about fairness from his own point of view, but his brother's viewpoint is important, too.
Assuming that his dad has legally assured that the stepmother and her children have no access to the family assets, the key fairness question is the one M.F. attempts to address: Whether and how to recognize his contribution to the value of the farm in the ultimate estate distribution.
Providing for him to receive something more than half of the estate to compensate for the value he's added over the years is fair in concept, but determining how much more requires consideration of two other relevant factors:
- Land that was owned before he joined (presuming he didn't add significant improvements) is a family asset and grows value on its own. That increase in land value is as much his brother's as his.
- Land and equipment acquired after he joined were probably financed out of farm earnings, and M.F. only contributed a portion to those earnings. He can fairly claim a right to some of that added value.
These two factors imply that "fair" means M.F. gets some -- but less than all -- of the increase in value since he's been on the farm.
Determining future value will be important for fairness, too.
Since this is a working farm, the land value on estate transfer will surely be defined at ag-use levels. In fairness to M.F., he'll need assurance, should Dan want to sell, that he can acquire his land at the same lower than highest-and-best-use value.
For this to be fair to Dan, M.F. shouldn't be able to buy at ag value, then sell at a higher level without Dan benefitting, too.
The first step in defining "fair" is to look for what is potentially unfair in any estate plan (as I did here) and to fix that. The next step is discussing the resulting plan with the heirs.