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Keeping Farmland in the Family

Passing on the farmland fairly is not as easy as giving your heirs cash, stocks or bonds.  Here are some practical ideas for passing on your land.

As you consider estate planning, you might feel the desire to keep your land in the family without unnecessarily tying your heirs’ hands.  Some clients are very clear: “All my farm ground must be given to my farming son, and he can never sell it!”  Another family is just as clear: “Let the kids split it equally, I don’t care how.”  However, as is the case with so many issues in life, most people are not at either extreme, but are somewhere in between.  What options are available?

One couple thinks clarity is the most important thing.  They describe their real estate in three tracts, and say (to their Trustee or other representative on death) “give Tract A to Allen, Tract B to Bill and Tract C to Carol (their three children).   The Trustee shall divide any other assets of our estate equally between our children. This might result in unequal dollar values being inherited by each, since the land values are almost impossible to equalize.
Another couple starts off that way—Tract A to Allen, B to Bill and C to Carol—but then, based on the real estate appraised values at death, “divide cash assets unequally among the children as needed to make each inheritance equal in total value.”  This can work if there are enough cash or other assets to use to make up the differences.
Someone else might define the three tracts, and say, “Bill being the farmer, has first pick; after he selects, then Carol gets to choose; then Allen gets the one that is left.”  They would still need to decide how to divide the other assets, such as unequally to equalize the overall values, or equally, or some other manner they believe is fair.
Then there is the approach that says, “All land will be divided among the children as they may agree.”  For a family that gets along well, this might work.  Unfortunately, the kids’ interests are usually quite different.  One wants maximum dollar value while others want property on which to earn a living.  This can make it very difficult for a harmonious estate settlement.
To any of the above, you could add other protection for a farming child.  For example, while living, you might give a farming child a long-term lease on property.  But be careful! This could reduce the fair market value of the land at your death, since the lease rights make it less attractive to an objective, third-party buyer. 
Similarly, you could direct that at the time of your death that the farming child receives a multi-year lease on some or all of the property, so that for some period he has the security of knowing he has that ground to farm.  The other kids can receive ownership of that ground (i.e. Tract A, B or C) but they would have to honor the farm son’s tenancy.
Let’s say keeping land in the family is your objective.  All land could be divided among the children (by any method mentioned) but subject to this condition: if any child wants to sell their land, they must offer it first to their siblings on the same terms proposed for any outside buyer.  That doesn’t tie the heirs’ hands, but makes sure family has opportunity to keep it.  For a stronger incentive to keep land, you might direct that before any child can sell, they have to offer it to the siblings at a discount.  While an outsider buyer might be offering $4,000/acre, perhaps (for example) it must be offered to siblings at 60% of the third party offer.  The child considering selling has a choice: he can keep the land or cash out—but the cash out will probably be for less money.  It provides an incentive to keep the land.
Any of these options can have time limitations—if you well within 10 years you have to offer it to brother for 60%–or something like “while any of my children are living.”

Whatever your desires, your instructions for dividing your farm will probably be memorialized in a living trust or in a will.  Either one remains changeable right up until the day you die or lose mental capacity.  Be sure you retitle what you own so it will follow the plan!  Instructions in a will typically require probate, so I usually recommend a living trust.  

Remember to coordinate these goals with estate tax strategies and asset protection opportunities. But think outside the box, and get good counsel to help you carry out your wishes. 
Originally published in Prairie Farmer® March 2010