If the pandemic has you looking at your will and wondering how to split your farm up, you’re not alone.
“COVID has increased the anxiety about our wills for all of us who are a little bit older,” said Merle Good, owner of GRS Consulting.
“When I’ve talked to farmers about it, they’re starting to say, ‘Maybe I better review this thing because there’s a higher risk right now.’”
But before sitting down for a family meeting over Zoom, Good has one tried-and-tested trick to help avoid a fight: “If you’re going to have a meeting of the family to talk about estate distribution, talk about concepts and not specifics.”
The problem with specifics is they don’t leave a lot of wiggle room.
“If you say the northwest quarter is going to your son or daughter, you’ll never, ever be able to change your mind,” said Good. “That’s where you have these tremendous family fights, because everyone thinks they remember what was said. Facts are negotiable. Perception is reality.”
Instead, Good approaches these conversations with concepts. The first is that the parents will die with some land.
“That’s the ultimate security blanket,” he said. “When you start transferring assets to your children while you’re alive, they might promise that they’re going to take care of you, but it’s only a promise. Keep some of your land to offset future concerns about the forecasted increases in health and senior care.”
The next concept he likes to talk about is whether any land will be left to an off-farm child. Roughly 85 per cent of Good’s clients plan to leave at least some land to an off-farm child, but there are almost always strings attached.
“If you leave your land to your off-farm child and then die tomorrow, what is the expectation of that gift? Can that child sell it the next day?” said Good.
“The vast majority of farmers say no — they want their farm child to have access to that land. There’s this family farm expectation that land should be held for a long time, not a quick flip.”
That’s become even more important as the price of land has increased.
“The elephant in the room is the value of land. Over the last 10 years, it’s exploded. If you sell a quarter at Cremona worth $800,000, that’s equivalent to 50 years’ cash rent.”
Accessing the land
So the first thing Good likes to consider in that situation is an access agreement for the land, with rent equal to around 30 per cent of the area average crop insurance coverage at the high-yield level (an easy way to determine the cash rent rate in a given area).
“You are allowed in your will to have a clause that says, ‘I transfer the northwest quarter to my non-farming child on the condition that they lease it back to their farming sibling for a period of X years,’” said Good.
Typically that term should be no more than 10 to 15 years, depending on the age of the parents (a longer term for younger parents; a shorter term for older).
If the off-farm child decides to sell that land in the future, you can also include a clause in your will that “the farm child gets the option to buy it before they sell it to the neighbour,” he said. The will could include a contingency about selling the land at a discount to the farm child if the non-farm child plans to sell during the lease period. After the lease period, that discounted value requirement usually disappears.
But what should the value be?
“If you say fair market value, all you’ve done is created a fight, because what’s fair? What I like to use is appraised value, and the appraisals have to be within 10 per cent of each other and then averaged.”
Alternatively, you can choose not to leave any land to an off-farm child, and instead leave them a lump-sum payment or an income stream.
“If you have an off-farm child who needs income more than wealth, you could consider leaving the land only to the farm child and then they have to provide payment or an income stream to the off-farm child,” said Good.
Good likes a blend of both approaches to help with cash flow both for the farm and the off-farm child.
“Put a third down so the off-farm child has got cash up front to do something with their life, then pay them the balance over 15 or 20 years at no interest,” he said. “What we’ve done is a combination of a wealth transfer plus an income stream, and the best thing about this agreement is you can claim that money totally tax free.”
But there’s no one-size-fits-all solution for all farm families out there, he added. That’s why it’s important to review your will and have these conversations regularly — not just when there’s a pandemic.
“If you’re making these arrangements to take care of your off-farm child, you need to consider the impact to the farm business,” said Good. “Because of COVID, it’s a good time to look at your will and review it one more time.”