farmgate: Dividing Up The Family Farm: Can Everyone Be Treated Equally?
Maybe it is just the folks you visit with more frequently, but it seems more than a usual number of farmers have decided they have had as much fun as they can stand, and are planning to depart active farming in the near future. For some that means a farm sale followed by a job selling equipment, seed, or farmland. For others that means turning over the family business to one of the kids who stayed home to work on the farm. But that becomes an issue when other children should share in the assets. What is the way out of the dilemma?
Frequently, farm families face the problems of transition. Either the farm is divided into a myriad of pieces that will not allow anyone to make a living; or a child who wants to farm has to buy his siblings’ land long before he can afford it. Farm transition specialist Dave Goeller at the University of Nebraska offers his idea in the Cornhusker Economics newsletter.
Goeller depicts a family with three children, one of whom came home to farm and became part of the family business. Prior to that time, it had been the plan of the parents to divide the farm equally among their three children. However, over time the contributions of the son who joined in the operation became significant. Additional land was rented. An additional enterprise was added. Machinery was purchased jointly. And the farming son had contributed a significant amount of “sweat equity” over time.
When it came retirement time for the senior generation, they faced the dilemma of how to treat each of their children fairly. If each of the three received an equal share, the son on the farm would not be rewarded for his contributions that enlarged the operation. And Goeller said a significant problem also results from the rapidly increasing land values that make intra-family purchases troublesome at best.
In this case, which would be applicable to thousands of farm families, the issue of “sweat equity” was converted from a problem to an answer. The parents developed a blended evaluation of the operation to allow all three of their children to share, with an additional element to acknowledge the contributions the “sweat equity” had made to the operation. The solution was achieved by comparing the size of the operation at the time their son joined the operation, to the size of the current operation. The difference was $900,000 and the son was credited with 50% of the growth of the operation or $450,000.
Since the initial value of the operation was $600,000, each of the children would receive one-third of the value, or $200,000. Additionally, each of the children would receive one-third of the value of the parents’ $450,000 contribution to the expanded operation, or $150,000 each. In this case, each of the three children received one-third of the parents’ assets, but the son who contributed the sweat equity was able to retain the full value of his contributions.
Goeller says one of the main issues is that everyone understands how the divisions are made, and that contributions equal compensation. He says since the family farm is larger and generates more revenue than it did when the son joined the operation, that son is rewarded for his “sweat equity.”
Is this example applicable in all situations? Goeller says no, because percentages will change, particularly in the sweat equity contributions, which could be substantially more or less. He says, “Treating unequals equally may be the most unfair thing you can do.”
Summary:
As challenges to farming increase, there will undoubtedly be increased turnover in farm ownership and management. A perennial challenge for many farm families is a fair division of the farm among children, some of whom are fully engaged in the operation and others who are totally disengaged. There are formulas that can be developed that will not only allow equals to share in the assets, but also allow unequals to be rewarded for their individual contributions.
Posted by Stu Ellis on October 28, 2008 12:22 AM to farmgate