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New Dirt Under the Old Plan

Can their problem be solved?

Problem: 

My husband and I are 76, farm with our son, own 840 acres debt-free, and just did something we promised we wouldn’t do. We took on debt to buy another 160 acres right next to us. I thought we were done! Our son wanted to buy it, but his balance sheet was maxed out. We did our farm plan eight years ago. Our wills give our land to our farming son. In turn, he is paying for an insurance policy on us that goes to our two off-farm heirs. We based the amount of insurance on $7,000 an acre, which seemed high back then! Everyone agreed at the family meeting that having a “farm bucket” and a “nonfarm bucket” made sense. We still do. The problem: We paid $10,000 an acre for the new farm. Now our off-farm son thinks we should redo the whole plan based on current values. Our daughter’s quiet, but our farming son is stressed because the goal line could move. I’m afraid this new purchase (and debt) could derail our farm succession strategies. How can we best fit our new land into our old plan? 

Solution:

Farmers often say they’re not hungry for high-priced dirt. Their bellies are full. Then a neighbor presents a tasty dessert tray of land they’ve craved for 30 years. The farming heir’s plate can’t support it, so it’s basically up to the parents. OK, maybe just one more bite!

Update your strategies, but that doesn’t mean scrapping your original plan. You had an agreement in principal. Changing it now, just because one child wants more, could jeopardize trust on all future decisions. Unless all parties agree to a change, then a deal is a deal. Land always goes up or down. If land went to $5,000 an acre, would your off-farm son insist on less cash?

If your will simply states that “all farmland” goes to your farming son, then your new farm is already included. You just need to reconcile how much additional value you feel is needed for the off-farm heirs’ bucket. If your will lists specific legal descriptions for each farm, then it needs to be updated to reflect the new deed, too. 

Was the debt contained to the new farm? Or were other farms collateralized? Does your will say the debt passes to the land beneficiary? Or is it paid off by the residual estate first? Both could have significant impact on the value going to each child. Understand how your debt is allocated when equalizing your buckets. 

Focus any potential updates to just the new farm. If you continue with separate buckets, then determine the value (net of debt) you want to offset for the off-farm heirs. Run the numbers to determine the financial gap. Then design a strategy to fill that gap. This could include residual cash in the estate, other nonfarm assets, a second life insurance policy, or requiring the farming heir to finance the difference prior to land distribution. 

Another option would be to split the new ground equally between all three, subject to a purchase option. The option could be for a percentage of the appraised value with a not-to-exceed price. That gives your farming son a fixed upper limit that he needs to plan for, while still providing equity to the off-farm heirs based on your valuation method. Just be sure the loan payments would cash-flow if he had to finance it. Actually, it’s smart to apply similar language for any future land in your estate, as well. You never know, maybe another neighbor shows up some day with a little more dessert!

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