Aristotle is reported to have said: “The worst form of inequality is to try to make unequal things equal.” When planning for the transition of ownership on the family farm or ranch, one of the major hurdles is always how to appropriately deal with the children who are not participating in the operation. Rarely would all of the children desire to work in the farm or ranch operation, and usually it would be extremely difficult even if they did. When discussing succession planning in the context of a family farm or ranch, a good working definition is: a process of decision making that:
- Protects the ongoing viability of the agricultural operation
- Provides for the orderly transition of the agricultural operation to new ownership
- Preserves family harmony
Most parents, however, want to treat their children “fairly” in their estate planning, and many assume this means having their children inherit equal amounts as defined by the value of the assets inherited. When it comes to planning for a family business, including a family farm or ranch, fair will almost never mean equal.
In planning for the transition of a family business, including a farm or ranch, I encourage our clients to consider your answers to the following:
- Is your goal to create an estate plan to pass the family business to the next generation or are you more interested in creating an estate plan to treat all family members equally?
- Has your son or daughter that is working in the business contributed to the growth in the value of the business and/or its assets?
- If so, is it “fair” to give the value they have built to the non-participating children?
- What is the relative value of the asset to the child after he or she inherits it?
Assuming the inheriting child truly desires to continue the business, the value of the gift of say $1,000,000 in farm land is very different than a gift of $1,000,000 in cash. The cash can be invested and relatively easily generate growth and income, maybe $50,000 or $100,000 per year, with no additional work of the child. The gift of the farm land on the other child will require substantial ongoing effort and may never net the farming child anywhere close to that in annual income. So would it be “fair” to give them an “equal” amount?
Consider the story of Robert. Dad and Mom have asked Robert to return to the farm and eventually take over the farm family business. They have offered Robert an annual salary of $52,000 per year. Robert has one sister and two brothers. None are interested in taking over the farm family business. Dad and Mom have said that they want to treat all their children equally. So, instead of paying the whole salary to Robert, they have told him that he will receive $250 per week and that each of his siblings will receive $250 each week. Robert, his sister and his brothers have been treated equally. Does this sound fair to you? If it is not fair during the life of the owner, why is it fair after the death of the owner?
Thankfully the answer does not need to be completely writing out the other children. Through careful planning, an inheritance can be established for the other children as well. The key, as always, is to seriously consider your objectives and what really does constitute fair.