How to start the next generation

The Problem (submitted by A.W.)

My wife and I are in our 50s and have four children. One son has been back farming with us for three years, and another son will be back home to the farm in May after college graduation. We didn’t know how to structure things when our first son came back, but we know that both of them want to farm, and we certainly have enough work. They are smart and could easily get jobs off the farm that pay very well. I’m not sure how we can compete with that corporate income, but they are choosing to come back to the farm. We want to help them get started, but we can’t just give them all of our assets because we need them to make our farm work. How should we handle this?  

                     

The Solution 

Many times with estate planning, we talk about steps at different stages, e.g., final steps for 75- to 80-year-old people, or first steps for new families. For you, we’re talking about in-between steps as you bring the next generation home. As you mentioned, farm finances are a challenge right now, and I don’t think giving them assets right away is the best idea, either. For comparison, let’s talk about athletic contracts. The news is filled with the monster contracts that athletes sign, including huge signing bonuses. I recently saw a Michael Jordan interview in which he commented that back in his day, the contracts started small, and they had to earn the big contracts. Now, athletes are given everything up front, and some then underperform and lose motivation to earn a better contract. It would be hard to operate your farm that way. I believe there are at least four possible considerations for compensation and a combination of these options may be best:

  1. There needs to be a reasonable base salary that they can count on every pay period. 
  2. Properly give them a commodity to sell. For example, give them 5,000 bushels of corn and let them figure out when to sell it. The value of marketing will become real. 
  3. Make them the beneficiary of some life insurance on you. What happens if something happens to you and they have to continue the current operation plus buy out siblings? Wouldn’t their situation be even more challenging than yours? Term life insurance could cover this time period and provide a lot of protection for a low premium. If that is not affordable or implemented, disclose that to them now so they understand how quickly things could go south in your operation.
  4. The use of collateral can be helpful. The next generation’s significant challenge will be having enough money for a down payment for anything. Land, buildings, and machinery are all very expensive and usually require a large amount of cash or collateral. Your young sons likely have neither. Allowing them to use some of your collateral can be a huge help to them. You need boundaries, guidelines, and documentation for that. 

Your farm may not be able to match corporate salaries out of the gate, but those corporations may not be able to match what you can offer later. The combination of a baseline salary, some risk exposure and protection, as well as opportunities for later can allow you to present a very attractive offer. It doesn’t need to be a huge guaranteed contract with a signing bonus, but it should be fair and provide opportunity for something greater in time.

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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