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Fair vs. Equal can be a Conundrum in Farm Succession Planning

01/02/2017


​​​Family businesses, including farms, are often full of unique contradictions and complexities. There are many matters which may appear to be at odds but actually support each other. Consider the familial differences of opinion between tradition versus innovation, business versus family and fair versus equal.

Families often come up against the challenges associated with fair versus equal in estate and succession planning on the farm – especially given the established roles and traditions already in place for many farming families. And since fair and equal are not the same (fair is a perception and equal is a mathematical calculation), the misunderstanding can often lead to problems. How can parents address this issue?

Consider this: The tradition of primogeniture – the right of succession belonging to the firstborn son – still exists in many families, especially when the son works with Dad on the farm. Pair this with the fact that the preservation of the farm often remains a primary focus for the older generation over other key familial considerations and you may find yourself verging on a family breakdown. Another factor often not taken into consideration by the older generation in estate and transition planning, is the fact that inheriting the farm used to be considered a burden. Hard work for poor dollar return held little desire for many farm families. Children saw how hard their parents worked and did not have a significant interest in continuing on that career path. Parents, meanwhile, tended to leave non-farming children out of ownership, since many believed the continuity of the farm was more secure in the hands of those who were farming.

For many years during times of low farm profitability, the only way to compensate farming children fairly was to gift full ownership of farming assets. It was also possible to offset farming assets with non-farming assets, such as life insurance or off-farm property. In large part, that practice remains in place when considering the succession process despite the increase in the value of farm assets.

Over the last several decades, thousands of farms have expanded in size and value as land and crop values increased and global markets expanded. Today, many farms are valued in millions of dollars.

When using the historical succession practice with today’s farm values, it's possible to have situations where a farming child gets the $10-million farm and non-farming children split the benefits of a $500,000 life insurance policy and various other non-farming assets.

Is that fair? One thing it certainly is, is a conundrum.

It's time to consider true and effective alternatives for transition planning for farmers. It’s also imperative for farm owners to have open and transparent conversations with their children and farm succession planning teams in order to come up with effective succession plans that account for everyone involved (or not involved as it may be).   

Some of my clients have implemented plans where the farm goes to the farming child and life insurance, along with non-farming assets, are divided among the other children. In another case, a farm was split equally among four children and the one who wanted to continue farming had to buy out the other three siblings.

In the first instance, the farming child, who is now the farm owner, is in control of his or her destiny, since he or she doesn’t need to consult with siblings about farm operations. Business planning and future financial management decisions are in the hands of the farming child. At the same time, this method can challenge the children's perception of fairness. If a farm is struggling, it may seem more like more of a burden than a gift and – like the decision-making – finances fall on one person. If, however, the farm is financially successful, non-farming children could view it as an overly generous gift compared to the non-farming assets they received.

When a farm and its assets are split equally among children, it becomes a multifaceted business transaction. The division may be equal, but the process to continue operation of the farm can be complex since extensive communication, governance planning and discussion among siblings is required to come up with or revise, the farm business plan.

There are as many different combinations for succession planning as there are farms, but it's critical to remember to give due diligence to the question of fair versus equal. It may no longer be appropriate to go the traditional route where "All the farming assets go to the farming child."

Woven into the complexity of deciphering fair and equal is the fact that conversations about succession planning are challenging. These discussions push all of us to come face-to-face with our own mortality, discuss dreams and goals of the next generation and take time to work out a plan. The farm is a way of life and income generator, but it's usually the property that's been in the family for generations, so it's natural to have significant emotional attachment to the farm. It's important to remember that the next generation likely has a similar interest in what happens to the farm – but they demand reasonable treatment when succession planning.

The key is engaging in the dialogue and the process. As a family, take time to discover the plan that fits you. My goal is to facilitate, coach and educate families on the process of discovery, which in turn allows them to plan the transition of the business and of the wealth in a way that best suits the dynamics of their family. I don't play the role of telling them the right answers. There are technical answers, but finding the balance between fair and equal and the path to achieving that– requires the family to engage in a process of discovery together.

For more information, contact Bob Tosh, PAg, FEA, Family Business Advisor at 306.665.6766 or [email protected]

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