When the succession to and ultimate continuation of a farm by the next generation is desired, planning for the family farm is not simply estate planning, and it is not simply business planning. It is difficult and nearly impossible to accomplish the clients’ desire to preserve and pass their family farm to the next generation without understanding the farm business and the dynamics of the family.
What is a family farmin the first place? A family farm is a family-owned business in which customers do not speak but depend on the farmer for everything, the primary competitors are nature and time, and educational prerequisites include a working knowledge of commodities trading, mechanical engineering, statistics, medicine, biology, genetics, administrative law, and so on. Farming is more than hard work and physical labor – it also requires intelligence.
Farming is both a business and a “way of life.”1 The phrase, “it’s not personal, it’s business”does not apply to the family farm. Accordingly, planning for the family farm requires one-on-one counseling as well as knowledge of the business of farming and the farm client’s values, principles, and culture. The farm client requires an empathetic, but not sympathetic, lawyer as a counselor.
This article walks through a farm-planning engagement organically. It begins by providing insight as to farm-specific information a lawyer should gather from the farm client at the outset of the engagement. Second, the article examines the concerns and goals shared by many farmers with an on-farm heir and off-farm heirs. Next, the article outlines the essential framework of holistic farm planning and the ethical considerations in identifying who is the client. Finally, the article provides a farm-client case study with an analysis including a potential planning strategy. While this article focuses on representation of the farm client, it easily can be applied to clients with family-owned nonfarm businesses or diverse real estate holdings.
Farming 101 for Lawyers
Learning about the farm’s operations and land is vital when working with farmers. Typical types of farming includecrop, vegetable, livestock, and dairy, with dairy being the most prevalent in Wisconsin. Each type has its own demands and lifecycle and, often, its own culture. With regard to the land, it is important to learn which portion is necessary to sustain the farm operations, which is nonessential, and which land serves which type of farming.
com shayna borakoveosman Shayna W. Borakove, New England 2005, is a partner in Borakove Osman LLC, Madison. She focuses her practice in foundational and advanced estate planning, estate tax planning, and business planning with an emphasis on small business succession planning. She is licensed to practice in Wisconsin, Minnesota, and Massachusetts.
Next, explore the family dynamics, focusing on what the farm means to each family member and on each member’s knowledge about the farm. For example, do other children know that their brother purchased into the farm or that his electricity bill and rent was his wage? Ultimately, based on the information gathered at the outset, the operations and farmland may need independent, but coordinated, planning to maximize what are often conflicting goals. Failure to consider this may ultimately defeat the clients’ farm continuation objectives.
The farm family’s story about the family and the farm’s operations will make clear the family’s concerns. Clients who have a child interested in continuing the farm operation might be reluctant to give up management and control. They may be concerned with whether (and how) the child will be able to purchase the farm assets and with accommodating the interests of the child’s spouse and the non-farm heirs who have moved off the farm and pursued other professions.
On-farm Versus Off-farm Heirs
When a farm family has an on-farm heir successor, the farm’s owners typically like the idea of creating a plan that articulates and defines a path for the on-farm heir to purchase the farm “operations” over time and the farm “land” if possible. Other goals may include the following: creating a plan for retirement to ensure steady income during life and adequate income or retirement for the spouse in the event of death; making provisions for disability or incapacity that enable the on-farm heir to continue managing the farm during disability or incapacity and after death; minimizing administration and taxes; avoiding probate; and passing a legacy to their children.
Above all, the farm family typically desires to treat children equitably so that the on-farm heir can continue making a living as a farmer and all off-farm children inherit upon the sale of the farm. The term “equitable” should not be confused with “equal” as it is quite rare for those terms to mean the same from both the parents’ and their children’s perspectives. From the earlier example, is it equitable for each equally loved child to receive an equal value of assets at the parents’ death when the on-farm heir helped contribute to the success and viability of the farm? Is it equitable for the on-farm heir to receive the entire farm with the other children receiving nothing? Or is it something in the middle as in the case study below? What is equitable is subjective, and the lawyer should seek the clients’ assistance in defining the term.
The lawyer should be especially cautious if the on-farm
heir will inherit more assets than his or her siblings or
receive favored treatment in any manner.
Life, health, long-term care, and disability insurance are important aspects of farm continuation planning. It is appropriate for the lawyer to highlight these planning considerations and concerns to the clients and provide input as to the proper channels available to secure such insurance. It is also crucial that farmers have made legal arrangements regarding the operation and management of the farm during potential periods of incapacity. At the bare minimum, all farmers should have a durable financial power of attorney and a power of attorney for health care to avoid court-imposed guardianship and potential limitations on the ability of the family to operate the farm without court restrictions. Creating a revocable living trust-based plan – that is fully funded – is also ideal to avoid probate, provide expanded directions upon incapacity, and coordinate the farm’s business planning with the farm family’s estate planning goals. Such planning should provide a clear management plan for the family’s finances to ensure the continuation of the farm and satisfactory family relations. The lawyer should create customized documents that coordinate the farm business with the farmer’s estate plan.
Deceivingly, the tabula rasa farmer is the most difficult client for lawyers because the entire structure from business entity organization to estate planning must be created and coordinated. It is definitely too much to cover in one sitting and often too much to cover over several sittings. In practice, it is ideal to divide and conquer the planning, then coordinate. Use your conversations with the family to determine whether the estate planning aspects of the plan or the business aspects of the plan should be handled first based on how the clients prioritize their needs and concerns. Essentially, which decisions can they make now, and which decisions have kept them from planning over the past three to four decades? Starting the planning process on the right foot dictates the entire engagement.
Identifying the Family Farm Client
Additionally, the lawyer must carefully consider who the client is. In the estate planning context, married couples can easily be represented jointly; however this still presents a conflict that must be expressly waived by both clients. With farm clients, the farm typically makes up most of the estate. Therefore, the lawyer may be presented with an ethical dilemma when the farm is “believed” to be individual property, as is typically the case in second-marriage situations.
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Given the high land values in Wisconsin, as well as the importance of farming to the state’s economy, the spouses’ planning goals might not be identical. Thus, the lawyer should determine each spouse’s goals (if joint representation is desired) and ensure that the client is clearly defined and the conflicts are explained and waived in writing. Depending on the circumstances, the nonowner spouse might need to retain independent counsel, especially if at the farm-owner’s death, the farm will not be given to or controlled by the surviving spouse.
In the business planning context, too, the lawyer should clearly define the client. As provided in the case study below, the lawyer may create an entity or be asked to coordinate a previously existing entity with the farm client’s estate plan. The client may be the farmer or the entity. This is further complicated if any entity is or will be owned with a child. To echo the previous paragraph, the client must be clearly defined, and waivers should be obtained. The lawyer should be especially cautious if the on-farm heir will inherit more assets than his or her siblings or receive favored treatment in any manner. Family matters are riddled with conflicts, and farmland often amplifies the degree and the aftermath.
Family Farm Case Study
The case study below illustrates some considerations when helping clients plan for family farms.
The clients, a 65-year-old woman and her 70-year-old husband, have been married for 50 years and have three children together. Their only son, age 40, is the “on-farm heir.” Father and son created a corporation together 10 years ago to hold farm machinery and crops. The clients have a close-knit family but realize that their “oral” understandings must be made certain. They wanted their son to be able to continue the farm upon their death or incapacity, but know that he could not buy the land unexpectedly at their death without sacrificing the permanent profitability of the farm. A summary of their estate appears below:
Cattle (beef) and cash crop farmers.
Approximately 400 acres of tillable land.
Land contract to on-farm heir conveying 40-acre parcel (home and farm buildings).
Fifty percent interest in Farm Inc. (machinery and crops).
Investments and life insurance.
The total value of the assets and estate is $3-$5 million (which largely depends on land valuation).
The clients want your guidance to accomplish the following goals:
Create a comprehensive estate plan that would avoid guardianship upon incapacity and probate after death and preserve the privacy of the family’s affairs;
Minimize estate and income taxes and unnecessary administrative costs for heirs;
Create a farm continuation plan to ensure the on-farm heir can continue to farm and support his family, while fairly and equitably distributing assets to all children if the on-farm heir stops farming or the farm is sold;
Protect the farm from effects of a beneficiary’s divorce or creditor issue; and
Facilitate family understanding of the planning now and minimize family disagreement later.
Summary of the Farm Continuation Plan
Here is a brief description of the estate plan my firm created for this family. In addition to establishing powers of attorney for finances and health care, the clients created a revocable living trust-centered estate plan with “spousal choice” disclaimer planning2 upon the first death, with the assets divided among the children upon the second death. All assets were funded into the trust (that is, retitled) as soon as possible, while the spouses are alive, to facilitate efficient management of assets upon a grantor’s incapacity and ensure the avoidance of probate upon death.
If there is a disclaimer, an asset-protected family trust will be created for any assets disclaimed by the trustee (the spouse if able and willing to serve as co-trustee with another child or independent person). The surviving spouse will receive all income from the family trust annually, with distributions of trust principal for health, education, maintenance, and support (sometimes called “HEMS”).
The land comprising the farm will be transferred into the LLC. The trust becomes the sole member of the LLC after the clients assign the membership interests to the trust. Alternatively, the trust could be the owner when the LLC is created. The LLC’s operating agreement spells out the succession of managers. Namely, upon the death of both parents, the trust will distribute the LLC interests to all children equally. During the administration of the trust, the on-farm heir is given an option to purchase the LLC interests with any inheritance he receives, and then proportionately from each member. If this option is not exercised upon the clients’ death, the LLC’s operating agreement gives the son a right of first refusal as well as a continuing option to purchase his siblings’ interests.
When a farm family has an on-farm heir successor, the
farm’s owners typically like the idea of creating a plan
that articulates and defines a path for the on-farm heir to
purchase the farm ‘operations’ over time and farm ‘land’
Given the importance of Farm Inc. to the on-farm heir’s current farm operations and livelihood, the balance of the corporation’s shares will be given to the on-farm heir as a specific distribution after the surviving spouse’s death (just as often, the gift is made upon the farmer’s death if his or her spouse is not engaged in the farming). Given the ultimate disposition of Farm Inc. if cash flow permitted, the clients could also gift the stock to their son during their life annually to use their annual gifting exemption. With respect to the land, factors such as the clients’ income needs, present tax basis in the property, and desire to provide inheritances to their two daughters make lifetime gifting an undesirable option for these clients.
Turning to the pure business aspects of the plan, the firm set up the LLC holding the farmland as a manager-managed LLC, initially owned by the trust, or alternatively, the clients and later assigned to the trust. Farm Inc. owns the farm operations and will continue as is. The corporate shares are assigned to the trust and handled as specific gifts under the trust at death. During the farm parents’ life, the Farm LLC will lease farmland to Farm Inc. Under the LLC, the manager has sole discretion to continue the lease agreement indefinitely or enter into new lease agreements. Upon the death or incapacity of both parents, the on-farm heir will succeed as manager of the Farm LLC. Under the operating agreement, self-dealing is waived for “named” managers, that is, the on-farm heir.
In drafting the business documents, it was important to do the following:
Waive any conflict of interest stemming from the lease agreement between Farm LLC and Farm Inc., regardless of whether the husband or the son was serving as manager, but only extend the waiver to family-member-managers;
Avoid additional contributions from any future members (the off-farm heirs) in the event the lease terms were too favorable to the on-farm heir and therefore create a deficiency in which the maintenance costs and real estate taxes could not be satisfied from the rental proceeds;
Prohibit any manager from selling LLC land to itself without member approval or extensive appraisal contingencies that provide an efficient and measured solution for the members to dispute the appraisal. In this situation, the clients may desire that a discount be given since no broker would be used and given their intent to ensure the farm continues as a family farm;
Clearly delineate the roles, duties, and rights between the manager and member to mute the nonfarmer family members.
Ensure that the on-farm heir is not permanently shackled to the farm but can hire other professional farm managers or rent the farm if he wants to retire or stop farming.
Prioritize that the farm stay in the family, but not unnecessarily so; and
Provide for all other matters relevant and personal to the farm and the farm family dynamics.
Before meeting with farm clients, consider the words of President Dwight D. Eisenhower: “You know, farming looks mighty easy when your plow is a pencil, and you’re a thousand miles from the corn field.” Farmers’ work ethic is outmatched only by the complexity of the businesses they operate and their need for thoughtful legal planning. Successful farm continuation outcomes are the direct result of communication, follow-through, and smart, thorough planning that gives careful consideration to family cracks and breaking points.
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Your practice focuses on estate and business succession planning. What drew you to that practice area?
From age 5 until law school, I either wanted to be a lawyer or was told I should be. I grew up thinking a lawyer’s job was to argue, fight, and win. Equipped with my mind, a pen, and a knack for being outspoken, I charged right through life and school to become a litigator in Boston.
Perhaps as a farmer’s daughter, I thought everything had to be so hard, and that is why I initially thought litigation was a good fit. Regardless, I learned that cleaning up messes is exhausting and unfulfilling. Just because you are good at something, does not mean it is good.
Then, unfortunately and fortunately, a conveniently timed car accident shortly after moving here nine years ago forced me to reevaluate my career. I gave up litigation, and devoted my practice to estate planning and business succession planning. I had grown up respecting family and its fragility, with a clear understanding of my own family’s concerns surrounding the unknowns of our farm’s succession.
Rather than arguing and fighting, I realized that careful and thorough planning provided the biggest win for all. Estate and business planning was a natural fit and the only way I was willing to continue the practice of law. These corresponding practice areas have allowed me to combine decades of experience with my knowledge of the law, to help prevent messes, keep families strong, and be fulfilled every day of my life.
com shayna borakoveosman Shayna W. Borakove, Borakove Osman LLC, Madison.
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1 Doris P. Slesinger & Julie Whitaker, A Portrait of Family Farmers in Wisconsin, CDE Working Paper #98-30, at 35 (1988) (quoting Marty Strange, “an advocate of farming as a way of life”).
2 If there is no disclaimer for estate tax reasons, the revocable trust will continue for the benefit of the surviving spouse, without probate.