Written By: Leah Chester-Davis, Mark Robertson, Tom Haarmann
If something happened to you today, would your family and farm business be taken care of? Would the farm remain in the family? Who would you want to run the family farm? What if everything you had worked for was lost in an instant due to a death, disability, or divorce?
Do you have a plan in place to safeguard your family and your farm business in the event one of these “dreadful Ds” rears its ugly head?
Tom Haarmann, Money Concepts financial services manager with Carolina Farm Credit in the Statesville office, has worked with farm families the past 20 years providing financial management advice, including the considerations needed in estate planning to protect your assets and your farm. Drawing on his background as an attorney (though he no longer practices law), Haarmann says there are a number of tools families can consider when looking at how to develop a transition plan.
“The first thing is to recognize that life happens. Farm families are not immune. All the dreadful Ds – disability or dismemberment, discouragement, disagreements, death, divorce – are out there,” Haarmann says. “Start with a general outline of what you want for the family farm business in the event any of these things happen. How do you want to address them? What’s the overriding goal? Do you want to keep the farm going? Do you want to transition it to sons or daughters? Do you have an exit strategy that may be different? Do you plan to sell the farm at some point? Are there partners involved?”
Haarmann says that once you have a crucial conversation with your family and maybe a trusted advisor, you need to list your goals. What do you want long-term? When you can answer those questions, it’s time to consider the resources you may need to put a viable, legal plan in place. That will likely include an estate attorney who is well versed in estate planning laws. It may also include a CPA, financial planner, and an insurance representative. If the farm assets and family relationships are complicated, a mediator may be required.
“By nature, a lot of us are very private about our finances, especially with something so near and dear to us like a farm,” says Haarmann. “Farming is not just an occupation; it’s a way of life so these decisions can be difficult but it’s never too soon to have them.”
Haarmann has seen plenty of horror stories play out with farm families, some who have lost farms due to a farm accident killing the main breadwinner and leaving a mountain a debt with no life insurance policy to cover it, resulting in the loss of a farm at a tragic time for the family. That’s why he urges families to start an important conversation and to schedule time to put a plan in place.
A number of tools are available, depending on what a family wishes and a good estate attorney can share options. Here are a few examples:
- A buy-sell agreement is a commonly used tool. It may be useful in a number of scenarios: if one partner wants to get out; if something happens to one partner; if a divorce occurs and a spouse needs to be bought out, for example. It’s an agreement of how partners might value the farm and who has the right to buy out a partner. It can be a one-page agreement that outlines the rules of the game so that everyone knows where they stand if something happens.
- A private annuity may be useful for the elder generation who wants to sell the business to a family member. This may be an option when they trust their family members and are able to take an unsecured promise that a child, for example, is going to make payments to them over time. It’s considered a sale; it removes the asset from the elder generation and in return, the elder generation gets a stream of payments.
- A self-canceling installment note (SCIN) is another tool that allows a younger generation to make payments to parents over a period of time. Upon the death of the older generation, any payments that haven’t been made are forgiven, hence the name self-canceling.
- Gifting is another option that may be used when the elder generation owns the farm and wants to gradually hand over the reins of the operation. They may gift shares or other values of the farm each year to children. It helps remove it from the estate of the elder on a gradual basis.
- A Family Limited Partnership (FLP) is another tool for parents to annually gift shares or value to children who are considered limited partners.
For more information, see parts 1 of these three parts series! Stay tuned for part 3!