Hang On Loosely, But Don't Let Go...

Keeping the Family Farm in the Family

Hang On Loosely, But Don't Let Go...

 

Dear Michael: We have two boys who are farming with us for the past decade. In the last five years, we've had the opportunity and the labor available to increase our operation to accommodate these boys and their families. However, it's left us with a lot of short-term debt on machinery and long-term debt on land. We know we could always turn around and sell the land for much, much more than we paid for it, but we'd like these two guys to have enough property to support their families and maybe their children will farm. It just seems like by the time we get this land paid for, the boys will be close to my age. What things should we be doing? We have two other children not involved in farming and they'll be expecting a share, as well. –Good Growth, Tough Planning For It
 


Dear Good Growth: I think every farm couple has to decide when enough is enough of asset accumulation during their lifetimes. In decades past, this typically didn't happen until farmers and ranchers reached the age of sixty-five or seventy.

With the growth in the past decade, I think many farmers/ranchers can now look at the land and assets they've been able to pay for and feel fairly confident in their ability to retire comfortably on the assets held. This is now occurring at ages fifty-five to sixty-five.

The problem with many people as they fail to change their method of acquiring property when they reach a certain age. It's ingrained habit to think Dad and Mom are taking the majority of the income out of the farm operation so they can pay the majority of the expenses – such as acquisitions of additional land, machinery or livestock.

Unfortunately, this 'habit', as it were, leads to a lot of problems long-term in the family farm business when there are one or more family members involved in the farm operation, and there are non-farming heirs to be dealt with, as well as many other issues.

The first issue would be why would you continue to buy depreciating assets (such as machinery, grain bins, or similar assets) when you reach the age of sixty or beyond?

This leads to two problems later on. If you should die, then all of these assets either go to your spouse or to your farming/non-farming children.

If you're leaving them to your spouse, you're going to leave her in the uncomfortable position of either giving or selling the machinery to the remaining farmers – your children who are farming with you now. Because many young farmers in this situation have such a limited history with their lenders, chances are Mom is going to be forced into an installment sale to help the children buy the machinery. Now you've put her in the position of being the banker, keeping track of what machinery you both had, and what's going to be traded, what's going to be sold and what's it all worth to her. If you really don't like your wife, this is the perfect situation to put her into.
If the equipment passes to both the farming/non-farming children, or just to the farming children in your will, expect a battle royale about the value of this equipment and how it's going to be paid for.

Farmers continue to buy replacement equipment for two reasons. One, because they now can and two, for income tax reasons. Ultimately as farmers/ranchers build these estate assets – and included in this is more than machinery (bins, hoppers, trucks, etc) all they are doing is building more and more to fight over someday – involving Mom, the farming child(ren), non-farmng children, and/or IRS.

Why not just start redirecting some of the farm income from Dad and Mom to the farming child(ren) now so that the farming child(ren) have the income to replace the operational assets of the farm operation? Ultimately, your net income will be the same (because you're not making payments any longer) and your farming children will get a head start on owning the assets s/he needs to survive. If you give the farming child(ren) your equipment to trade in and keep farming your acres with his equipment, now we've got succession planning happening. When you die, when the IRS or the other non-farming children come to see what's their share, the farming child(ren) can say ìIt's all mine – I bought and paid for it – see!'

Too many people hang in there too long and create a financial monster by not taking time to think about the long-term results of doing things the same old way. Sit down with someone who can come up with creative solutions how you can keep operating your farm how you want to, and only give up the things you aren't going to need someday anyway.

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Mar 20, 2013 3:24 PM
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