Cook Land and Realty

Farmer asks how to unite a farm divided among multiple families
Farm Financial Strategies associate Mark McLaughlin offers his advice.

By Mark McLaughlin Published on February 19, 2024

Farmers holding hands illustration
PHOTO: ILLUSTRATION BY MATT WOOD
Problem:
My parents left 1,200 acres divided equally between me and my two non-farming siblings. They left us zero options in their will. Fortunately, we all get along great. Both siblings want to keep the farm intact. That’s wonderful because we can’t afford to buy them out! But what do we do for the next generation? Our middle son farms with us. Our other two kids do not. Someday, our kids will own the land with their six cousins, who are far removed from the farm. They don’t even know where most of our land is. How do we keep our farm together when it’s already divided between families?

Solution:
Sometimes I jokingly ask, “Do you want me to be honest, or do you want me to be nice?” Those approaches often will yield two entirely different answers! Honestly, you have a lot at risk. Here are my concerns:

Control: The decisions of your siblings, in-laws, nieces, and nephews now impact the viability of your operation going forward. Each one may have different expectations for income and liquidity needs in the future regardless of what they say today.
Contraction: Your parents owned and operated 1,200 acres. But if you continue this default distribution, your son will own 133 acres. That’s an 89% decrease in the land base. We need to grow our farms, not divide them.
Cash flow: If it doesn’t cash flow to buy out your two siblings today, how will your son be able to buy out eight other heirs?

Here’s what’s nice: Your siblings want a plan that works for everyone. Could you all agree on these three core principles?

The family farm should be preserved for the next generation.
Family members should have rental and purchase options before any outsiders do.
Everyone needs an agreed-upon exit strategy that doesn’t bankrupt the farm.
You can build a solid plan if there’s agreement on these principles. First, identify the preferred vehicle to hold and transfer the land to the next generation. Establish the rental options and management control within that vehicle. Next, develop a valuation model and buyout terms for any land sold between family members. Then do the math. What’s it going to take financially to make it cash flow between generations? Funding options often include cash assets, bank financing, and/or life insurance.

There are many ways to structure this. Here are three possibilities:
1. Estate Documents

Each family modifies their wills/trusts to reflect the core principles as noted above. Your risk is that they (or their surviving spouse) could change their documents without your knowledge.

2. Third-Party Agreements

Operate under a long-term lease, and draft formal purchase options signed by everyone. Recorded agreements can take precedence over wills/trusts and require all parties to sign off on future changes.

3. Land Holding Entity

Design the entity’s operating agreement around the core principles. This maintains operational consistency for your son regardless of ownership. Each family can independently control how they distribute their ownership to their respective kids. Percentages of the entity could be incrementally sold, gifted, or inherited back to your son over time.

In a perfect world, farm succession planning starts at the top with the parents. However, sometimes we simply don’t get that option. Bringing your parents’ divided farms back together may be a challenge. But seeing three families work together to meet that challenge is honestly nice.

Mark McLaughlin is an associate with Farm Financial Strategies and a co-owner of Farm Estate GPS in Ankeny, Iowa. He grew up on a family farm near Defiance, Iowa, and shares in the fifth generation of ownership. McLaughlin has helped farm families across the Midwest develop their farm succession strategies for the last 18 years. Find an online resource to help families understand their options and take control of their succession strategies at farmestategps.com.

Missouri Ruralist logo
Don’t let farm crash and burn: Start new year with succession plan
Business Basics: Have family meetings while you are still alive and hear what the owner and heirs really want.

January 22, 2024

3 Min Read
View from an airplane over agricultural landscape
SKY VIEW: It is easy to see how amazing a farm is from 30,000 feet, but when it comes to keeping that beauty in the family, too often we run out of time to bring the next generation in for a smooth landing. Succession planning should be a goal for every farm in 2024. THOMAS WINZ/GETTY IMAGES
by Wesley Tucker

Several years ago, I heard speaker Rena Striegel, president of Transition Point Business Advisors and creator of the DIRTT Project, describe succession planning as an airport runway.

She asked the audience if they had ever been on a large plane forced to land on a shorter runway than it really needed. The moment tires touched down, the pilot was forced to slam on the brakes and hit the reverse thrusters.

Passengers are pinned against their seat belts and thrown back and forth. These landings are rough and come at great risk of personal injury to passengers, or worse yet, the plane could go off the runway to crash and burn.

When you choose to begin the farm succession discussion, it is very much like that airport runway. The sooner you begin talking about it, the longer your runway is, and the smoother your landing can be.

Trouble on the tarmac
Recently, I was visiting with a family who were becoming more and more frustrated with their efforts to keep the farm in the family.

An uncle recently passed away, and with no heirs, everything went to his five nieces and nephews. For the most part, the cousins all agreed their uncle would want the farm to stay in the family. Four of the five had developed a workable plan. However, there was one holdout who only saw dollar signs.

As we talked, I shared if these discussions had taken place while the uncle was still alive, this individual’s behavior would have likely been very different.

In my experience, heirs are less likely to act against the elder’s wishes if they are forced to do it in front of them. But wait until after the funeral, and the knives come out. Money brings out the worst in people.

This is just one more reason I am so adamant these discussions must take place while your loved ones are still with you.

Touch down with family meetings
I always encourage farm businesses to conduct three types of family meetings:

farm operating meetings for day-to-day needs

farm business meetings for those actively involved in the business

family council meetings for the broader extended family.

It’s no surprise that of these three types of meetings, family council meetings are the ones people find most difficult to begin. Why is that?

Family council meetings usually have the greatest potential for conflict. Don’t get me wrong, there is still conflict among family members working together in the business during farm business meetings. But the divide between on-farm and off-farm heirs is usually greater.

So what do most families do? Simply put, they stick their head in the sand. They avoid it. Does that mean the problem goes away? Of course not!

To help you structure meetings, visit extension.missouri.edu/publications/g515. Use it as a guide to discuss succession planning with those extended family members.

Start now to soften approach
If you wait until Dad has just been diagnosed with cancer so you only have six months to get everything done — or even worse, Dad just died — then your landing is going to be very rough. It will come with great risk of injury to family members, the family unit and the longevity of the farm business.

So, take Striegel’s analogy to heart, if you don’t want your farm business to crash and burn or family members to get injured in the process, give yourself a longer runway so it can be a smoother landing.

Rip off that Band-Aid now while you are still alive, and start having difficult family discussions. Good luck!

Tucker is a University of Missouri Extension ag business specialist, succession planner and national conference speaker. He can be reached at [email protected] or 417-326-4916.

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Consider a flexible cash rent lease
Farm Business: Here are examples of flexible cash leases and how they would pay out.

Michael Langemeier
September 20, 2023

CAPTURE REWARD: Flexible cash leases allow landowners to share in good years that garner higher revenues without penalizing tenants through exorbitantly high base cash rents. TOM J. BECHMAN
Flexible cash leases appeal to landowners interested in capturing the upside in years with relatively high crop prices, big yields or both. They may also be attractive to landowners reluctant to lower cash rents, particularly given the uncertainty with respect to crop prices in 2023 and beyond. Switching from a fixed cash rent lease to a flexible cash rent lease allows for a lower base rent while simultaneously allowing landowners to share in relatively high crop revenues, if they occur.

Parameters to consider for a flexible cash rent lease include base cash rent, crop revenue triggers and landowner shares above the revenue trigger. For this illustration, parties set base cash rent at 90% of current cash rent. Crop revenue triggers are computed by adding base cash rent to nonland costs. The landowner share above the crop revenue trigger can vary. Here, it’s 50%. A bonus is added to base cash rent if actual crop revenue is above the triggers.

Simple example
Here’s how a flexible cash rent lease works. Assume current cash rent is $250 per acre. Base cash rent will be $225, or 90% of current cash rent. The farm uses a corn-soybean rotation. Using cost budgets for corn and soybeans, crop revenue triggers are $943 for corn and $677 for soybeans.

How high must yields or prices go to trigger a bonus? The first scenario uses above-trend yields and expected prices. The second scenario uses trend yields and relatively high prices. For this example, trend yields are 190 bushels per acre for corn and 58 bushels per acre for soybeans. Expected corn and soybean prices are $4.90 and $12.80 per bushel, respectively.

Under the first scenario, corn and soybean yields would need to be higher than 192.4 and 52.9 bushels per acre, respectively, to trigger a bonus payment. Using trend yields, under the second scenario, corn and soybean prices would need to be higher than $4.96 and $11.67 per bushel, respectively, to trigger a bonus payment.

In both scenarios, it is easier to trigger a payment for soybeans than corn. If just one crop has a higher yield or price, a bonus would not necessarily be paid. Also, a bonus of $25 per acre would be needed to obtain the same total rent as in a fixed cash rent lease.

Figuring bonus amount
Assume actual prices and yields are 10% higher than base yield and prices. Corn and soybean yields become 209 bushels and 63.8 bushels, respectively; and corn and soybean prices are $5.39 and $14.08, respectively. Using these assumptions, corn and soybean revenue are $1,127 and $898 per acre, respectively.

For both corn and soybeans, actual crop revenue exceeds the trigger. Using our trigger revenue amounts and a landowner share above the trigger of 50% results in a cash rent of $326.20. That’s base cash rent of $225 plus the average bonus payment for corn and soybeans. For corn, the bonus is: [($1,127 - $943) x 0.5]. For soybeans, it is: [($898 - $677) x 0.5].

The flexible cash rent payment at $326.20 is considerably higher than fixed cash rent of $250. This scenario illustrates how bonus payments are computed. Assessing if it’s likely that both prices and yields would be up 10% is another matter.

For more information on cash rents and land values, visit the Center for Commercial Agriculture website.

Langemeier is a Purdue Extension ag economist and associate director of the Purdue Center for Commercial Agriculture.

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