The family farm has always been unique from an estate-planning perspective. Unlike many traditional businesses, a farm business typically holds a disproportionate amount of illiquid assets such as real estate, equipment, crops and livestock. It often has few liquid assets. Important planning needs to take place to deal with the incapacity or death of family-farm owners.
Let’s say Farmer John passes away. He was married with six children. Farmer John inherited the farmland along with livestock and equipment from his parents. They received it from their parents. That happened before he met his spouse and he never added his spouse’s name to the real estate or business interest. Years ago when the kids were little, Farmer John created a will primarily for the purpose of naming a guardian for the kids. The will says all of Farmer John’s assets will pass to his spouse. If Farmer John’s spouse is also deceased, those assets will be divided six ways. Upon Farmer John’s death a probate is necessary.
Probate is the court-supervised process of transferring Farmer John’s assets to his beneficiaries. But Farmer John had a will and he’s married. It doesn’t matter.
If a person passes away
- with assets in his or her name,
- without a beneficiary designation, and
- the total of those assets (in Wisconsin) is more than $50,000
the estate will need to be probated.
Probate comes with its headaches, especially for family farms. Time and money are the two biggest culprits. In terms of money the estate will need to pay the executor as well as filing fees and other court costs. The probate filing fee is 0.2 percent of the estate’s total assets. Assets considered in Farmer John’s example are land, buildings, machinery, livestock and planted crops. For a farm that fee alone can be substantial, especially in an estate consisting of mainly real estate with little cash on hand. Selling assets may be required to pay fees, expending money earmarked for a spouse or beneficiaries.
Attorney’s fees should also be considered. Dividing a family farm can be extremely challenging. Take the example of Farmer John’s six children.
Let’s say hypothetically that Farmer John’s spouse passed first. Two of the children live on the farm and two live near but not on the farm. Two live out of state and don’t talk with their siblings.
Consider who will be the executor.
- The eldest son thinks it should be him, but he’s not on the farm and doesn’t know anything about running a farm. But he’s the oldest.
- The youngest daughter thinks it should be her. She’s been practically running the farm since she was 12.
- The CPA daughter thinks the youngest daughter has always been spoiled and is not smart enough to deal with the farm’s financials.
Even if a decision can be made on who becomes the executor, then a decision needs to be made concerning how to divide the land, equipment and livestock. Farmer John wanted the farm to go on for generations. He didn’t want one or two of his kids to force the others to buy them out. Or worse he didn’t want them to force a sale of the farm to pay them off.
Those can be difficult subjects, potentially leading to a lot of unnecessary costs if the beneficiaries don’t see eye-to-eye. That’s especially true when mom or dad, who was always there to keep the peace, is no longer able to mediate. Defining “fair” in a family-farm situation is often the most difficult task to accomplish in estate planning. If that term isn’t considered by Farmer John prior to his death, the default rules or a six-way division will likely leave everyone feeling the solution was unfair.
It’s also important to note that probate is a public process. With family farms that creates a unique situation because many farm deals are done with a handshake as opposed to a written contract. As a result people may appear claiming to be creditors because once upon a time they made a handshake deal with Farmer John. Handshake deals on whose cows are whose or who is renting or using the land and equipment are two of the most common disputes in farm probates. Those claims need to be thoroughly investigated, which will result in additional time and money for the estate. Additionally all creditors will be notified of the probate process, requiring many unpaid obligations to come due in a short time.
Estate planning is about analyzing goals. Think about what is most important to the farmer and the farm family. Probate can be avoided. A well-drafted estate plan can eliminate unnecessary cost and fighting. Consulting an estate-planning attorney, preferably one with experience dealing with the uniqueness of the family farm. The correct options can be chosen to ensure pitfalls don’t deprive heirs of a lifetime’s hard work.
© 2019 Agri-View. Madison, WI. Reprinted with permission.