How can on- and off-farm heirs manage the land?
We are seven third-generation siblings and cousins who inherited a large farm operation several years ago. Only three run and manage the farm. We all understand that the land that existed at the time of the transfer needed to be distributed among all seven of us. We'd like to know what is fair for the future.
Should the land's appreciation be evenly distributed among us all? Is there any value that can be attributed to the on-farm heirs' sweat in adding the fertilizer, irrigation systems, etcetra to the land?
Also, how can we determine a fair rental to pay the four off-farm heirs for use of the land?
Future land purchases are an issue, too. If land that we rent becomes available for sale, who has the right to purchase the land? The on-farm heirs have worked it for years, but this was rented by our family before the on-farm heirs took over.
The on-farm heirs feel they should be able to buy property that they've rented and worked for almost 20 years. The others want to buy it as an investment and a 1031 exchange.
What is fair in our case?
Ideally, farmland belongs in the hands of farmers. In reality, as in R.F.'s case, including off-farm heirs in estate distribution of land is thought necessary for a variety of reasons, including parents' fairness objectives, emotional attachments, potential for appreciation, and the opportunity for nonag-use returns.
The sweat equity question arises frequently. If the on-farm heirs were deliberately underpaid, it was probably for the usual reason that "someday this will all be yours, so don't worry about it." Since these understandings are seldom in writing, it was the parents' responsibility to right this in some form of differential distribution at the transition. They didn't, so that undefined sweat equity is gone.
Assuming the farming heirs have been reasonably paid for their work since the transition (and why wouldn't they have been?), they were paid to increase that value for all owners (themselves included). No sweat equity exists now, either.
Determining fair rental should be easy -- just analyze the local market. But this rent is appropriately divided among the seven owners not just the off-farm heirs. They don't seem to think this way, which will get them in trouble.
As co-owners of the land, they will face many issues like this. What they should be considering is how to achieve the right scale and governance structure.
For example, if the farming heirs want to buy more land, they may not have enough capital or collateral to do so. A landholding LLC with all the land combined possibly could. Approving that debt is an issue for all of them to decide.
This family could combine their assets to create an LLC to own the land. It could provide predictability for the farmers through long-term contracts, while giving all heirs a say in the governance of the assets.
If the on-farm heirs have the means to acquire new land separately, they hold the trump card since they are the ones who will farm it.