Fair vs. Equal Strategies for Asset Distribution
Recent farm succession research by UW-Madison Division of Extension educators indicates that the division of assets for inheritance is a common tension around farm succession planning. This study found that 54% of participants felt stress over how assets were divided. The participants’ comments regarding this stress were grouped into five main categories, business risk, sibling harmony, emotions, personal risk, and treating assets strictly as inheritance and not as business assets. In some cases, the tension can be so great that the owner generation avoids making a decision until it’s too late which may allow their assets to default to the state’s plan, which typically mandates dividing the assets equally between the children. If the goal is to continue the farm to the next generation, dividing the assets equally may jeopardize that. Oklahoma State University has created a statistical model that compares various transition strategies and their probabilities of success. The results demonstrate that the most common farm succession strategy of dividing the assets equally among all heirs has the lowest success rate. Farms employing this strategy normally do not continue to the next generation 1. Making decisions and following through with them can alleviate the successor’s worry about their financial ability to purchase the farm assets. Having a succession plan allows the successor to prepare for ownership of the farm assets, whether it is through inheritance, purchase, lifetime gifting, or a combination of the three. Solidifying the owner generation’s goals and priorities for their retirement needs and estate plan, allows them to better communicate these goals to the heirs and/or business successors. Service providers, such as attorneys, accountants or other professionals can use these goals to tailor their suggestions and strategies to better fit the needs of the family. An overview of the following tools and strategies is provided to help owners and successors become familiar with these options before meeting with planning professionals. Familiarity with these tools and strategies will give owners and successors a better understanding of the strategies as they discuss them with professionals. Farm families may want to consider a combination of these strategies to fit their unique asset distribution needs. Unequal Gifts of Essential Business Property Owners of the farm business may choose to transfer the essential assets of the business to the on-farm heir. These assets may include livestock, machinery and equipment, tools, and buildings that are critical to the business. For a business to survive, these things may need to be passed on to the business heir even if this means the business heir inherits a larger percentage of the parent’s assets. Estate planning tools (Wills, Trusts, and ownership of property) Wills are a set of instructions for the distribution of assets at the time of death. Wills are easily changed, and assets distributed through a will are subject to probate. Probate is the court process of validating the will. The instructions in the will can distribute assets however the owner deems appropriate and can set parameters for the purchase of assets between heirs. Parameters could include a set price, a formula for a price, and an interest rate if a purchase is done over time like a land contract. The instructions may also include that assets be available for the on-farm heir to rent for a set period of time. A trust is a legal entity that has the power to hold assets. Trustees and beneficiaries need to be identified for each trust that is created. A set of instructions would be developed outlining who makes decisions for the assets and who receives the assets or the benefits generated by the assets after the owners pass. Assets in a trust are not subject to probate, unlike assets that are transferred by a will or by the state’s default plan. Depending on the type of trust, the date the trust was implemented, and the trustees and beneficiaries chosen, a trust may provide some protection against Medicaid Recovery in Wisconsin. Any assets moved to a trust would still be subject to the Medicaid programs “look back” period or may still be considered the owners’ assets, despite being held in the trust name. For more information about Medicaid Recovery visit: https://www.dhs.wisconsin.gov/medicaid/erp.htm and https://www.pa.gov/en/agencies/dhs/resources/medicaid/medicaid-general-eligibility.html The way the property is owned or titled may have a bearing on how it is distributed. For example, if property is owned as tenancy in common, and one of the owners dies, the deceased’s interest is transferred to his/her heirs. Joint tenancy exists when two or more persons own the entire property with the right of survivorship. This means that at the death of one joint tenant, his or her interest passes directly to the surviving joint tenant(s). It does not become a part of the decedent’s probate estate. Therefore, it cannot be controlled by his or her will and is not subject to creditors’ claims against the estate. The last surviving joint tenant becomes the sole owner of the property2. If one is unsure of how property is titled and owned, a consult with an attorney can be helpful. Business Entities as Transfer Vehicles Corporations, limited liability companies (LLCs), and limited partnerships may be an option to transfer business assets to the on-farm heirs. The assets in the entity could be transferred to the successor over time allowing the owner and successor to co-own the entity. The transfer of ownership could be achieved by selling shares of the entity in the case of corporations or interest or units in the case of LLCs. The owner could choose to gift ownership of shares, interests, or units to the successor. The purchasing or gifting of shares, interests, or units guarantees the essential business assets are in the appropriate hands. The entity can also have language in the operating agreement or legal documents as to how the owners’ shares or interest are to be transferred at death. It is important to consult with an accountant or tax professional regarding gifting and sales transactions that may have tax consequences. Purchasing Agreements There are many different types of
Court Decision Splitting Up Family Farm Reversed: When Farm Succession Planning Fails
The article is not a substitute for legal advice. Farm succession planning can be a complicated process for many farm families. A decision out of Minnesota involving a farm dairy’s succession plan highlights what can go wrong when farm families do not handle the situation. The parents had three children, and one child had moved back to take over the farm. The parents placed the farmland into a revocable trust with each child as a beneficiary to the trust. The trust allowed the three children to co-own the property and granted one owner the ability to petition the court to partition (divide up) the property. This case highlights why farm families should develop plans to enable the child(ren) who want to continue the farm the ability to sustain the farm but at the same time be equitable to the non-farm heirs. Background The Neumanns operated a dairy farm consisting of two parcels of land. In 1995, the Neumanns conveyed their two parcels of farmland into a revocable trust, with the couple’s three children as beneficiaries of this trust. In 2004, a daughter (Pronschinske) and her family purchased the Neumanns’ dairy herd and leased both parcels of farmland. Pronchinske and her family moved a mobile home on the farm and converted the dairy into an organic operation. Mr. Neumann passed away in 2008. In 2009, Pronchinske and Mrs. Neumann entered into a written lease for the farmland, with both parties agreeing that the value of capital improvements Pronchinske had made would apply to the purchase price of the farm in the future, or alternatively, Pronchinske would be compensated for the cost of capital improvements. Mrs. Neumann died in 2012, and the three children became co-tenants in the farmland with equal undivided interests. In 2015, one of the Neumann children commenced a partition action against his siblings, Pronchinske and Anderson. A partition action is when the court divides a common property among its co-owners or requires the property to be sold and the money divided among the co-owners. Minnesota law requires that referees be appointed in such cases to determine how the property should be divided. Referees are disinterested parties who interview the parties involved in a partition suit, view the property, inspect as needed, and recommend to the court how to handle the partition suit. The three children in this case agreed on the appointment of two referees. In late 2016, the referees issued a report to the district court. In the report, the parties all agreed to 1) use a 2012 appraisal and 2) that the property could not divide without great prejudice to Pronchinske who wished to continue operating the farm after making substantial improvements. The referees recommended that the court award Pronchinske both parcels of farmland with a credit of $119,000 in capital improvements and pay $387,667 to her two siblings. The district court sent the report back to the referees to clarify what “great prejudice” towards Pronchinske in the report meant. In 2017, the district court granted a motion to set aside the report, finding that the report was only advisory and not binding on the district court. The district court also found that there was no evidence of great prejudice to all the owners, just Pronchinske. The district court concluded to divide the farmland into equal thirds to the three children. Pronchinske appealed that ruling. Court of Appeals Opinion On appeal, the court had to determine how much deference the referees’ report was owed. Legal scholars had previously written that deference should be given to the written report unless the referees made a procedural error that adversely affected the rights of one of the parties. If the court does set aside a report, then the court needs to refer back to the referees or appoint new referees. The court determined that the district court should have deferred to the referees’ report. In reviewing the report, the district court erred in not deferring to the referees’ report. Reviewing the referees’ report, the court determined that one sibling viewed allowing Pronchinske to buy the property as a forced private sale and preferred the property be put up for public auction. The other siblings were not in favor of a public auction. All this demonstrated to the court that the district court had erred in not properly deferring to the referees’ report. The court reversed the district court’s decision, although this ruling may not be the final word on this decision. Why Care? The parents in this case made a decision many farm families make; they decided to treat each kid fairly by giving each an equal share of the parent’s estate. Dividing assets equally, however, is not always fair to the one child who may still be running the farm. Talking to your family and developing a plan that is fair but still allows the one sibling to continue on the farm is your better choice. As this case highlights, a revocable trust giving equal rights to all the siblings is probably not the right method to reach a result that allowed Pronchinske to continue to operate the farm. Imagine how you would feel if you are Pronchinske. You have built up a farm, built a home on the farmland, and are now potentially going to see two-thirds of your farmland sold with no guarantee you will be the highest bidder. Developing a farm succession plan allowing Pronchinske to continue operating the farm while treating the other two siblings fairly would have been a better way to work this out. Developing your farm succession plan can prevent problems and potentially save family relationships after you are gone. References Neumann v. Anderson, A17-1450, 2018 WL 1997090 (Minn. Ct. App. April 30, 2018).