Transitions are hard. It doesn’t matter what the transition involves, the nature of moving from one thing to the next is complicated. Farmland may be one of the toughest, says Steve Bohr of Farm Financial Strategies in Lisbon, Iowa.
JENNIFER SHIKE
Transitions are hard. It doesn’t matter what the transition involves, the nature of moving from one thing to the next is complicated. Farmland may be one of the toughest, says Steve Bohr of Farm Financial Strategies in Lisbon, Iowa.
“Farmers often believe that what differentiates him or her is their ability to own the land,” Bohr explains. “And by God, you’re not taking it away from them. A lot of times, land ownership doesn’t transfer until death, and I’m okay with that. But we’ve got to drill down and figure out how that land is going to transition from one generation to the next.”
Over the years, he’s discovered there are three fundamental areas of concern in an estate and farm transition plan that each family should independently address — cost of administration, creditor protection and transition plans for land and operating assets.
He shares five options to consider for the transition of land assets.
1. Give the land to the farmer.
The first option is to get the land transitioned to those who are farming it or have an affinity to own it, Bohr says. Each generation cannot afford to take a step back in equity and expect to compete in today’s marketplace.
“The clear problem with that is, how are we fair to the ones who aren’t interested in farming? Every family is different,” he says.
If your family is expecting to farm the same (or more) acres with a land base that has been divided across siblings, each generation will be in a weaker position to complete. How many times will your family have to pay for the same land? Which generation will eventually lose it due to no fault of their own (other than choosing to carry on the legacy)?
2. Divide the land equally.
An undivided ownership in real estate can cause great anxiety for the owners of the land who want to farm it or who want to continue to own it, he explains. There is a greater chance of peace if you divide the land, but also a greater chance it gets away from the family.
“Most people believe this is the answer,” Bohr says. “I don’t believe that, because the problem with dividing the land is that it’s a recipe for the land to get away from us. Whether it’s divorce, bankruptcy or poor planning.”
At some point in time, the more people involved, and the more independence those people have, the land’s going to get away from you. If it doesn’t, then it has to be divided again at the next generation. By the time you divide a farm two generations, the grandkids don’t have enough to be able to farm.
“We are dividing ourselves right out of the plat book,” Bohr says.
3. Deed land into a family trust.
Leaving the land in trust after death may be a wise option for families who cannot afford to get the land to one heir and who do not want to divide their land. There are solid reasons to leave the land in trust for management, including if one or more children have marital, money or addiction issues or if one or more children are independently wealthy.
Oftentimes, leaving land in trust gives a false sense of security that may be deferring the problem to the future.
“When we leave it in trust, we’re asking for big problems. Whenever that land comes out of trust, it can be very inflexible,” Bohr says.
4. Create a family land entity.
A land entity like a Limited Liability Company (LLC) or Family Limited Partnership (FLP) has become popular for a family where the first three options do not fit.
“I call this the boomerang plan because the rules in the operating agreement of the entity always bring the land back to the family,” he says.
Those entities will have rules, and within the entities, those rules will talk about lease options and purchase options at family pricing and terms, whatever that looks like. A vast majority of them are special use paid over a 30 -year contract so they can guarantee opportunity and affordability for family members.
5. Develop a hybrid plan.
There is not one plan that fits all families. That’s why a combination of multiple options sometimes works best for most families. A hybrid plan gives everybody an opportunity.
“Right now in succession planning, I think we have to give a huge amount of understanding to what will or won’t cash flow,” Bohr says. “What are the tax ramifications? What is the timing of the transition? And are we going to give an adequate opportunity to those who are going to be that next generation in our communities, paying taxes, going to churches, going to schools?”
