If you want your farm to successfully transition from one generation to the next, you must do better than a vanilla will that says you want to leave everything equally to your children. Don’t assume your children will figure it out when you’re gone. They likely won’t.
Fair does not mean equal, and it’s OK to treat your children differently. Change your mindset to think about your farm in two units—land ownership and operations.
All of your children can own the land. Your on-farm child can own the equipment, either through lifetime buy-in or because you leave that child the equipment at your death. Perhaps that child receives the equipment “off the top” at your death, in recognition of the sweat equity contributed to the operation. To somewhat offset the equipment going to one, perhaps the other children receive more of additional assets, such as cash, vacation home, insurance proceeds or jewelry.
If your goal is to keep the land together without giving one owner the ability to trigger a sale of the ground, then the land title must be held by a trust that continues for a period of time or by a business entity, such as a limited liability company (LLC).
If your children inherit the land, with all of their names on the deed as tenants in common, then any one of them can go to court and force a sale. This is known as a partition action. No matter how small their undivided interest is in the whole, one tenant can force a sale if he or she is in disagreement with the others.
If the land is held in continued trust, then the terms of the trust govern when and how trust property might be sold or transferred. You select the trustee, most likely the on-farm child, a disinterested third party or trust company. Your children, as beneficiaries of the trust, might receive all of the net income produced by the farm. You might allow the trustee discretion to reserve some income for improvements, such as tiling or fence repairs.
Trust ownership also gives you control over future land owners. Your children don’t actually own the land, so they can’t say where it goes at death. Those who wish to prevent children’s spouses or step-grandchildren from owning farm ground in the future should consider a trust. If you have one child without children and you want to make sure that child’s share ultimately stays within the family, trust ownership is a great solution. Trusts also provide protection in the event of a child’s failed marriage, bankruptcy or other creditor claims.
Transferring your farmland to a LLC can help with lifetime gifting of farmland and provide a structured way for your children to inherit the ground. Your kids don’t own the dirt. They own a piece of paper indicating they own X% of the interests in the Family Farm LLC, which are subject to the restrictions you put in the operating agreement.
An LLC can have voting and non-voting interests. Your on-farm child can hold the voting interests and control the day-to-day decisions regarding the ground, including renting the ground to himself. However, don’t exclude the non-voting owners from all management. Define big decisions that might require a majority, super majority or unanimous approval of all owners, such as mortgaging land or drastically changing the use of the land, so everyone feels involved.
Whether the ground is in a trust or an LLC, if you intend for the on-farm child to rent the ground, then the other children should be involved in setting the cash rent rate. If you wish for your on-farm child to pay a reduced rent rate, clearly communicate that with all your children while you’re still breathing and have all your marbles.
Open communication is key to a successful farm transition. The fewer surprises, the less likely your children are to run to court claiming they’ve been denied something to which they feel they are entitled. I hate that word, “entitlement.” It’s your family farm. You decide what’s next.