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Family has a hard time arriving at buyout value for shares in a corporation

Can their problem be solved?

The Problem (submitted by M.K. in Minnesota)


We have a big family with seven children. My husband and I have owned much of our farmland for over 50 years. Unfortunately, much of it ended up in a C corporation that was eventually converted to an S corporation. Several times over the last 20 years, we were advised to give shares to our children in fear of federal estate tax changes. The average value back then was less than $1,000 per share. Now, our children own a lot of stock, and it’s valued at over $3,000 per share.

Ironically, due to the increased limits, we don’t have an estate tax problem, but we do have a problem with all the shares we gave away and who we gave them to. When we gave all our children shares, we got everyone together to explain our intentions and why we made the gift. Ten years ago, they agreed to a buy-sell agreement. However, it did not include enough details. Now the time has come to implement the buy-sell agreement, and we are having a hard time getting people to agree on a price. As a parent, this is very upsetting because some of the kids have already forgotten our intentions. Our farming heir feels like he’s being ganged up on, and our nonfarming heirs feel like they should be getting more. What can we do now?

The Solution

It’s kind of a bummer when you feel like you are doing the right thing and then it comes back to bite you. 

Unfortunately, you (and others) have given assets away in fear of the federal estate tax cliffs. The rationale was that a 40% tax would really hurt. You may have assumed that giving shares to all of your children presented less of a problem than giving money to the government. Then land tripled in price, estate tax limits went up instead of down, and now you face a different problem.   

Heirs often keep track of their share values just like a 401(k) and, ultimately, expect to receive their full value. Anything less than full value could make the nonfarming heirs salty, but unless there is a significant discount, the farming heirs cannot afford the buyout. 

You did mention the key word here. The word is more. There are all kinds of ways to say it, but many times it simply comes back to someone wanting more. 

Here are seven things you can – and should – discuss.

  1. Review your goals and intentions to keep the land together for the purpose of giving the farming heir a chance to farm it or buy it. At each family meeting, focus more on intention and how that relates to pricing.
  2. Recognize that the starting point of fair market value has a range of numbers. Sellers naturally start high, and buyers naturally start low. 
  3. Apply discounts due to lack of marketability and lack of control. They are real. Everyone agrees on discounts that save taxes but not when discounts are applied for determining a buyout value. Managing expectations is tough.  
  4. Understand and explain cost basis and tax implications. 
  5. Explain intentions and facts to help people feel like something isn’t being taken away. Expect resistance.
  6. Be prepared in case your intentions aren’t honored through previous gifts. Perhaps unequal distributions of remaining assets could be used to compensate.
  7. Keep in mind another cliff is set for January 1, 2026.   

Unfortunately, there may not be a perfect solution here. Instead, focus on what you can control and review with your farming heir how to avoid these issues the next time around.

Myron Friesen is co-owner of Farm Financial Strategies in Osage, Iowa. During the past 19 years, he has worked exclusively with farm families across the Midwest to develop farm transition strategies. Friesen grew up on a Mountain Lake, Minnesota, farm. He owns and operates a 910-acre crop and livestock farm with his wife and four children. farmestate.com

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