How, or how not to “kill” the farm

Dear Michael: We have been struggling lately with making certain our farm operation is going to keep operating. We have three children and the youngest son is trying to take over the operation. However, he’s only twenty-three years old, he’s single, and still taking college courses while farming. We have two other children - much older than the farming child - who left the farm early on and haven’t shown any interest in it other than wanting some farmland as an inheritance. As we are getting into our late sixties, we should be doing something, but we seem stuck between generations, as we want to retire, yet our son’s too young to take over. Plus, we want to be fair to our other children and give them the land like they want. We have some money in savings, which could go to the other children, but what happens if we need it to use this money? Is the best thing just to split the land three ways and let our farming son buy back the land? - Stuck Between Generations.

Dear Stuck: Well, if you really want to listen to your non-farming children and split the land three ways, the most honorable thing you could do for your farming child - still in college - is tell him to change his major from agriculture to accounting, computer sciences, or whatever cause he can make a living at as farming won’t do it - if you carry on with this line of thought.

You have to understand a basic theory - a lending rule ag lenders have used for decades. Any farmer who carries more than a fifty percent debt to asset load is at a very high risk of losing the farm. Once the borrower passes fifty-five percent debt to asset ratio the possibility of getting operating loans, equipment loans or any loan at all is getting pretty slim - especially with tightening credit looming for ag lenders. By the way, don’t think for a moment the loan crisis in the U.S. has passed the ag sector by - it’s just hidden right now behind record prices.

Now you’re putting a plan together that says ‘Okay, farming child, apple of my eye, I expect you to buy out your siblings two-thirds share at the time of our death’. In other words - go into debt for sixty-six and two thirds percent of your asset base. Just a tad higher than any sane lender would use.

If you happen to have a calculator around, take that two-thirds share based on current market value of land and if he pays his siblings over twenty years, you are going to come up with a number that your farm has never been able to produce - ever! Now factor in what inflation has been doing to farmland costs and you should really be seeing reality now.

Instead of him going to school and working towards the dream of farming someday, shouldn’t he be put this dream aside and spend his school years getting an education in something he can earn a living at? You’re not only giving him an impossible challenge - you’re wasting his educational years!

A farm that is split three ways like this has no chance of every coming back together as a working unit ever again.

Let’s take a look at some reasonable solutions because splitting the farm is the same as killing the farm.

First of all, you need to make certain that the funds you have in savings are protected - from long term care costs, medical costs, Medicaid, etc. It won’t do much good to have this earmarked to go to your non-farming children

If those funds are insufficient to provide an equitable settlement to your non-farming heirs, then the next best solution is to set up an irrevocable life insurance trust using a low cost second-to-die policy. Half a million dollars would cost right around three thousand dollars per year or less a year - if you’re in decent health. We put it in an irrevocable trust because inside the trust it is protected from Medicaid, estate taxes, income taxes and the neither the bad things that can happen to you or your children will affect these proceeds going to your non-farm children.

I always have people tell me ‘I can’t afford $3,000 per year for life insurance on my farm budget” and my answer is always the same “If you can’t afford $3,000.00 now, how in the world is your farming son going to afford $60,000 in payments to his siblings in the future??” We are, after all, talking about the same farm here, aren’t we?

If all else fails, we need to put in a rent/purchase option for Jr. on the farm so at least he knows he’ll be able to rent the farm from his siblings - at least until they change title on the land and the rent/purchase option ceases. It would give a chance in a hundred, at least, versus the three-way split which has a chance in a million of succeeding.