Dividing land could be farm’s end

Is equal fair? We will be hearing this question over and over again during the coming monumental transfer of Iowa farmland as the current “baby boom” generation retires and passes on. There is no one right answer, but it is clear: Dividing farmland equally among farming and non-farming offspring means we are going to lose many Iowa farms.

Dividing land could be farm’s end

Is equal fair? We will be hearing this question over and over again during the coming monumental transfer of Iowa farmland as the current “baby boom” generation retires and passes on. There is no one right answer, but it is clear: Dividing farmland equally among farming and non-farming offspring means we are going to lose many Iowa farms.

Dan Wilson of Paullina is one of the farmers who is concerned. Last year, his mother, Beth, transferred her 640 acres to a limited liability company, making Dan the manager and giving Dan and his three nonfarming siblings equal shares.

Dan has farmed the land his entire adult life. His brother Brent works at a Des Moines area company; sister Holly is a corporate manager who lives on the East Coast; and brother Colin used to farm but now is a missionary in Haiti.

Dan and his wife, Lorna, have five children: Son Torray (and wife Erin) farm with Dan and Lorna. Son Jaron is starting to farm with them. Daughters Robin and Faye live close by but do not farm. A third daughter, April, had lived in the Twin Cities but has moved home and may want to farm. Dan’s mother, Beth, lived on the farm until 2009 and now lives in town. His father is deceased.

Key Points

Dividing farmland equally among farming and nonfarming heirs raises issues.

A farm succession plan needs to be structured to allow future flexibility.

There is no “right plan” for everyone on how to handle family farm succession.

Use a trust or an LLC?

Beth transferred the 640 acres to the LLC, because “she didn’t want to see half the farm sold to pay taxes,” when she dies, Dan says. Beth originally wanted a trust, but the Wilson lawyer advised that an LLC would be better because that structure would allow for more planning on how to continue the farm. He said sometimes trusts can cause rifts in a family after the parents are gone.

Originally, each child would have received 160 acres, and Beth didn’t want any of them to turn around and sell. “So now we each have one-fourth interest in the LLC,” says Dan.

The LLC structure doesn’t recognize that Dan’s family has put its life’s work in the farm. Instead, Dan gets the same interest as the others. Dan has added value to the farm. In addition, Dan spends a lot of time taking care of Beth, which is a family issue but important as well.

His siblings have retirement accounts. For years Dan thought his retirement income was going to come from renting his portion of the farm ground. Dan’s dad retired when he was 62, and he then got half of all the rental income from then on until his death. So his retirement account was Colin and Dan at first; then Dan when Colin stopped farming. With the new LLC, Dan will get only one-fourth of the rental income. Three-fourths goes to his non-farming siblings.

Other details to consider

And his children who are farming will get even less. There are 15 in the next generation. Lorna and Dan are taking a financial investing course to broaden their horizons on how to pay for retirement.

Dan and siblings are discussing whether the LLC could buy life insurance for the nonfarming heirs to give Dan’s children a better chance at being able to farm. Lorna and Dan have already taken out a co-policy with their nonfarming kids as the beneficiaries.

Brent has his mom’s financial power of attorney. So there are some potential differences there, as Brent is trying to get the most money for Beth. Brent wants the county average rental rate; Dan would like a discount on the rent, as that is most advantageous for his sons (who are the renters). Brent wants Dan to charge an hourly rate for managing the LLC. Dan doesn’t want that hassle.

Beth used to give Torray and Erin a discount at least in part because of the beginning farmer tax credit. But now the LLC can’t take advantage of that. Still the new LLC has its benefits as well as burdens.

LLC has benefits, burdens

Through the process, the Wilsons found out that the ownership of some of the land was not what they had thought. Years ago, an attorney had failed to record the change transferring some of the land to the offspring, with Beth retaining a lifetime use.

Dan reports there is indeed more conversation between the siblings because of the LLC. Dan has met regularly with Brent, and there is better communication. With Beth gone, it would have been harder. “Mom was here to tell us what she wanted,” says Dan. “The LLC really fired up my mother. She felt a huge burden lifted once it was established. Her top goal was to see the farm stay together. That was her and her husband’s life’s work.”

Beth may be at peace, but for Dan and his family, the process of keeping the family farm going for his next generation is not clear. “We realize we have just begun.We have met our Mom’s needs to keep the farm together for now and reduce estate taxes. We have a framework in place that we can build on,” Dan says. “There needs to more conversation and work to get to where we need to be.”

Opheim is executive director of Practical Farmers of Iowa in Ames. Contact her at t[email protected].

Is this a good plan?

Editor's note: We asked a professional for his opinion of the Wilson family’s farm succession plan. Here’s the response from Landis Wiley, an agriculture financial adviser for Principal Financial Group.

The three nonfarming siblings should have a good understanding of the farm’s financials. Managing the perception of nonfarming siblings is critical. Often nonfarming siblings don’t have an accurate idea of how little many farmers net with their operations. Siblings in a recent case that I was involved with thought the farm’s net income was three times what it actually was.

The nonfarming siblings need to have a good perspective on the time factor as well. That is, the ebb and flow of farm income over the years, especially because recent years have been lucrative ones for corn and beans.

Dan, have you opened up the books so that the siblings can see? Sure, the value of farmland is high and gross income may look great. But explain all the labor hours your family puts into the farm. Your nonfarming siblings may be pulling in $150,000 incomes, plus all their benefits. Do they realize how little your net income is for the amount of work involved?

Having a facilitator there when you have a family meeting is helpful. You need to lay the groundwork so that siblings can understand the farm, including decisions you make for tax reasons (like purchasing new farm equipment). Once the siblings have that perspective they can decide on what’s fair.

Equal on paper may mean that Dan and his family will not be able to farm in the future.

Finally, there needs to be a conversation among the four siblings: What happens with your kids? Right now, the farm has four owners. What happens when there are 15? What if one of those 15 gets a divorce? The arrangement set up now will not hold the farm together in the future and will handcuff Dan and Lorna’s children. At some point, you will need to reconsolidate ownership if your family is going to farm.

Ideally, Dan would have control of managing the limited liability company. You cannot build a sustainable operation having control of only 25% of the net income of that operation.

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SUCCESSION talk: (From left) Torray, Dan, Lorna and Erin Wilson enjoy a “discussion” with one of the youngest members of the next generation of their family. The Wilsons are updating their farm succession plan.

This article published in the September, 2014 edition of WALLACES FARMER.

All rights reserved. Copyright Farm Progress Cos. 2014.

Tax/Estate Management

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