Owning a farm is a big responsibility but also a labor of love for many small family farmers. However, it does present challenges when completing estate planning. If you have multiple potential heirs, how can you pass on your farm in a fair and equitable way that not only protects them but also protects the farm? Here are a few ways to do this.
1. Arrange for Buy-Outs. If one heir wants to continue working the family farm, you can still distribute your estate to all heirs through the use of buy-out arrangements. A buy-out occurs when the farm is left to all the heirs, such as a group of siblings, while those who want to keep it pay the others to buy their shares. Many heirs accomplish this by taking out new mortgages and paying off co-heirs.
2. Consider Life Insurance. Life insurance isn't just a way to provide living expenses for your immediate family. It can also be an estate planning tool. Consider a parent of two whose estate is largely tied up in their $500,000 farm property. They could leave the farm to the sibling who had been working it with them. A corresponding life insurance policy of $400,000-$500,000 would be taken out with the other heir as beneficiary.
3. Create a Farm Trust. Placing the farm into a family trust can provide income for all heirs while not requiring them all to work on it. One sibling might work on the farm directly and pay rent to the trust, for instance. All heirs share the income from the trust, which maintains ownership and responsibility for the property. Or, the siblings could lease the land and receive income from the trust, preventing it from being sold outside the family.
4. Include Stipulations. The person drafting plans for their estate can include certain requirements and stipulations. You might specify that the farm cannot be sold outside the family for a certain number of years, for instance. This gives family members time to decide if they want to farm it or if there is some relative who'd like to do so. Or your will might state that the farm can only be used for agricultural activities for a length of time.
5. Offer Right of Refusal. Give heirs more options by allowing them to sell the farm — but requiring them to first offer it to a group of individuals you choose. They may even be required to offer it at a certain discounted price. If no one in the group wants the property after being given first right of refusal, then the heirs may move on to selling it.
Which of these estate planning tools is right for your family farm? Start by learning more about each option and how it would work in your situation. Meet with an estate planning professional in your state today to begin.