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).

Paul Goeringer

Paul Goeringer

Paul Goeringer specializes in legal risk management as it relates to agriculture. Prior to coming to AREC, Paul worked at the University of Arkansas where his legal research was focused in the areas of environmental compliance, right-to-farm laws, agricultural leasing laws, contracting issues, federal farm program compliance, recreational use and agritourism issues, and estate planning issues in agriculture. Through this research Paul developed educational materials to better help Arkansas’s agricultural producers understand and manage legal risks in their operations. Since joining AREC, Paul has worked with county extension educators to begin to fill the void in the areas of agricultural leasing and legal issues in estate planning. Paul is also looking at modifying his existing research in the areas of environmental compliance, right-to-farm laws, and federal farm program compliance to benefit Maryland’s farmers. Paul is a graduate of Oklahoma State University with a B.S. in Agricultural Economics, the University of Oklahoma with a Juris Doctorate, and the University of Arkansas with an LL.M. in Agricultural Law and an M.S. in Agricultural Economics. Paul is licensed to practice law in Oklahoma and is a member of the Oklahoma Bar Association, the American Agricultural Law Association, the Southern Agricultural Economics Association, and the Agricultural and Applied Economics Association.

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