One of the great symbols of our country’s independence is the long-standing tradition of fireworks. This year, we were downtown in Cedar Rapids, Iowa, watching the massive display of fireworks that closes out the city’s Freedom Festival.
Over recent years, private (and often dangerous) fireworks displays have become more numerous than professional displays. Fireworks demand more respect than given as they are extremely dangerous and can cause serious damage.
My son sent me a video from Twitter of a private Independence Day fireworks celebration gone wrong. In the video, a gathering of about 12 people sitting approximately 15 feet from the ignition area watched as a teenager lit the fuse on a rocket and yelled “Run!” The rocket fell over and exploded into the crowd.
As bad as the original blunder seemed, it was nothing compared to the subsequent chaos as a spark from the first rocket ignited what seemed to be large boxes in the back of an open hatch of a nearby minivan loaded with fireworks.
In a matter of seconds, the back of the van detonated in a barrage of outbursts that pelted the crowd already desperately seeking cover.
Who would have guessed that this would end badly?
In-laws powder keg
This video paralleled two of my meetings from this afternoon. Sharing may help you avoid the same mistakes. The first family is dealing with the destruction of their family farm forced to auction by the court through a partition act.
When Grandpa passed away in 2000, half of 380 acres stayed in trust for their four children through his will. Grandma received the life income until her death. This planning strategy was extremely common back when the estate tax exemption was $1 million or less.
This family, like many others, had done their “estate plan” but had forgotten about the farm. There were no rules to manage their land after the estate distributed it equally to their heirs.
Between the time of Grandpa’s death in 2000 and Grandma’s death in 2019, one of their four children also passed away, leaving three grandchildren (children of the deceased child).
Now there were three living children inheriting an undivided quarter of 380 acres and three surviving children of the deceased child each inheriting an undivided one-twelfth of 380 acres.
With no rules for the farm (lease options, permitted owner restrictions, purchase options if someone wants to sell with a method of a family price and family terms), having six different owners (and six different in-laws) across two generations become an explosive situation.
All that they were missing was a spark to ignite the box of fireworks stacked in the back of their family mini-van. The spark came six months later when one of the four children was the second bidder on a neighboring farm that auctioned for $17,000/acre. The “winning” bidder was one of the in-law’s brothers.
Earlier in the day, an unrelated family made the comment that fit this situation, “In-laws are a powder keg waiting to go off.”
The ingredients for a disaster were clear:
1. Two generations of heirs with little education on land ownership.
2. A neighboring sale at $17,000/acre ($6,494,000 of perceived “lottery winnings”).
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3. Two families already emotional over past land competition.
4. Adults watching but not thinking ahead what could happen.
Who would have guessed that this would end badly?
Family disasters are not all avoidable, but many can be minimized. If you set off a rocket in a box of fireworks, of course bad things are going to happen (and quickly).
The first step in farm transition is to identify future owners. One extreme is getting all land to as few of your heirs as possible (one is the easiest) to reduce arguments and future management issues.
If the plan of one person owning the land with cash to the others will not work, then you could divide the land among your heirs. This is a problem as land often does not divide, and dividing land is the eventual path for land to get away from the family.
If this is a concern, consider a plan to put land in an entity (trust, LLC, FLP or corporation) with a written set of rules designed to accomplish your goals.
The next step is to identify if your plan will (realistically) cash flow for the next generation. A land loan over 20 years at 6% interest on a purchase price of $14,000/acre will require a cash flow payment for the buyer of $1,203/acre. This is not sustainable and requires significant subsidization from other resources.
A $7,000/acre price paid over a 20-year loan at 6% would require an annual payment of $601/acre.
As another example, a $4,000/acre price paid over a 20-year loan at 6% would require an annual payment of $343/acre.
What it boils down to is that a land purchase requires subsidization in the current market to bring the loan per acre down to $4,000/acre or less. The problem is that not all have the available resources to subsidize.
How far upside-down in this marketplace are we that a $4,000/acre price for land can be difficult to cash flow over the long-term? What is the future of our industry if young people have no chance to buy a farm in their own community? Who do you think will own the land in your community after this generation passes?
The final step in the process is to implement a plan and communicate it with your heirs.
Implementation can be difficult as the terms and tools used to implement can be complicated. We do not live in the same world as we did 30 years ago, so you should not expect to use the same techniques that you would have 30 years ago.
Finding out the details of a farm transition plan after death could be the spark that could ignite the grand finale of family fireworks.
Consider communicating your plan in a family meeting or at a minimum write out the details (including the “why” of your plan) and send it to your heirs. Ask them for feedback. Explain to them why you are doing what you are doing.
My sincere hope is that you will be able to communicate and implement a plan with positive cash flows to diffuse explosive situations that have recently created uncertainty in our land transition environment.
For 30 years, Steve Bohr has been a partner in the farm continuation firm of Farm Financial Strategies, Inc. For additional information on farm continuation issues or if you have a question please contact Steve via email at Bohr@FarmEstate.com or by phone at 1-800-375-4180.