How to value a livestock operation when estate planning
Problem: How do you put a price on the livestock portion of a farming operation when estate planning?
Our farm has both land and livestock. I think I know what we need to do with the land portion of our planning, but the livestock portion of our estate is the challenge. We have about $10 million in barn value but figuring out how to distribute it is tough.
Raising livestock has always been a part of our operation, but we would not have nearly as many barns without two of our four children being involved in the farm. Plus, the cash flow from our livestock and barns has helped us buy more land.
Our livestock work is relentless. Our two farming children have been here every step of the way and they are the reason we’ve expanded. I know the barns have a lot of value, and sometimes I think just the two children should just get everything related to the livestock. But then I see the value on our balance sheet and I feel a little guilty. Maybe our other two children should get a little something for the value of our livestock operation. How do we handle this? - Submitted by email from N.H.
You sum it up well, N.H. I have a bunch of hog barns myself, and the work is truly relentless from the start with permitting, building, securing capital, daily chores, repairs, and alarms on nights and weekends. That doesn’t even include dealing with contracts, markets, health risks, and hired labor.
Sometimes valuing barns is tough based on building prices, demand, and the age of the barns at the time of death (which of course we do not know).
Having land as an outlet for manure is a benefit for the livestock production aspect of the business, and having that fertilizer readily available is a bonus for the land portion. Manure has value, especially right now.
For estate purposes, we know livestock facilities won’t last forever, so they are different from land. Yes, the returns can seem attractive, but barn repairs can drain capital at times.
Often I am OK with setting a formula or an actual number for the land valuation, but barns are different. Here are a few things to consider or ask as you move forward.
- I have a hard time suggesting a reward for those not involved in the future with no risk and no sweat.
- I would not make the mistake of giving participating kids more livestock and less land. We know the land has the potential to be there for many generations, but the livestock could change within one generation.
- What was your farm like before your nonfarming children left home? Your two farming children have added a lot of value after the others left home. I once had a client look at the value of his estate when his children left and any of the growth that occurred after they left was distributed to those who stayed.
- Would your nonfarming children even complain about not getting as much of the livestock facility value? If so, offer to give them a bigger share after they contribute both capital and sweat like your farming children have. I have never had nonfarming heirs jump in at that point given that option. That alone should eliminate any guilt you have for an unequal distribution plan regarding the barns.
- Be sure to have clear documentation that allows the livestock operation to always have use of the land for manure distribution purposes.
Over the past 40 years of raising livestock myself, there have been times people have commented, “It must be nice,” referring to my livestock barns. Maybe there are parts that are nice but it is not easy. I am kind of old-school and I still believe in rewarding the contributors.
Myron Friesen is co-owner of Farm Financial Strategies in Osage, Iowa. For the past 22 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 1,700-acre crop and livestock farm with his wife and four children. farmestate.com.