The credit for the invention of the boomerang goes to the Aborigines. Prehistoric man would throw stones or sticks at prey. Eventually, they realized that a curved stick actually created accuracy and velocity.
They found that the perfect curve in the stick would bring the weapon back to the thrower — the boomerang.
With communication and training, the boomerang effect is what most of our clients are after so that they can transition land to their heirs with a plan for it to always come back to the family.
There are four basic types of land transition plans within a farm family:
1. No plan. This is more common than you would think. This plan leaves the estate in equal shares with no mention of the farmland or options in the future.
2. Divide land among individual heirs. Historically this is what most families have chosen to do to “avoid arguments” of common owned land.
This seems logical, but historically this strategy has been the catalyst for land to get away from the family. Find a plat book for your county from 50 years prior and take note of the names in the area then compared to now. After two (and certainly three) generations of estate divisions, a different family typically owns the land.
3. Distribute land to one heir with other assets to the other heirs. This plan works the best for the continuity of the farm, but of course has a downside in the fact that most families do not have enough “other assets” to go to the “other heirs.”
4. Keep the land together as a unit with rules for multiple heirs to continue ownership. In the event that the previous plans do not fit your family situation, you can establish an entity with rules for future management. These rules identify permitted owners (lineal descendants), lease options (for lineal descendants), purchase price and payment options (under family terms) if anyone wants or has to sell, and a supermajority vote so the minority who may want to continue to own the farm cannot get outvoted or “pushed out” for wanting to keep your rules.
There are many details to work through, but the biggest takeaway is the fact that your estate (at death) or gift (while living) can transfer ownership of the farm as a unit to guide family members with options to rent and own the land, and with rules to settle disputes (not the courts) if your heirs cannot agree on their own.
We affectionately refer to this as “guiding from the grave.” Your heirs can mutually agree to change your rules. However, if a minority of your heirs want to stay with your rules, your guidance matters.
We also refer to this as the “boomerang plan” because the land will always come back to the family.
A recent family meeting produced an opportunity to outline the importance of having a plan. After a lifetime of ownership of 600 acres, Mom and Dad left their estate equally to their five children. One of the children had predeceased, leaving four children to each get an undivided fifth and two grandchildren to share their deceased father’s fifth.
The two grandchildren decided to sell their share of the land. The four children agreed to purchase their nephews’ undivided 1/10th at fair market value.
The land appraised at $5 million by a certified appraiser, but the undivided 1/10th was not valued separately. With no adjustment for lack of marketability of a 1/10th undivided interest or opportunity cost of a drawn out sale, simple math dictated that each of the nephews’ share seemed to be worth $500,000.
The four children’s offer of $800,000 ($400,000 each) represented a reduction of 20% due to those factors. If neither side moves in negotiation, there is the possibility of the court getting involved (a partition act).
This process takes time (maybe longer with the COVID pandemic) to divide the land or to auction it and divide the cash.
The time delay and added expense is the fundamental logic a professional appraisal for the undivided interest says would yield a reduction in the range of 15-22%.
With no options in the estate plan, the negotiation centered around what exactly is the “fair market value” of an undivided interest of land. To help educate both sides, we discussed the following family issues to avoid a partition:
- All parties agreed that the land should stay in the family. It did not seem appropriate to value it for auction prices set by an appraiser of comparable sales outside the family.
The closest thing to a family valuation appraisal for farmland is special-use valuation set up under IRC section 2032A. This is a formula based on its use as farmland (cash flow purposes) if it is to be farmed and owned within the family and not sold in the open market.
For land that would cash rent for $260/acre with $25/acre property tax and an interest rate (for 2020) of 4.65%, the formula would be ($260 - $25) / .0465 = $5,053/acre for a family cash flow value as an example. This land could appraise at $8,000/acre as an example in comparison.
- If two others later decide to sell, this price method would create a loan for the family buyers of $3 million to buy out three-fifths of the land and would require an annual payment of $237,000 (cash flow of $658/acre to buy out three-fifths of 600 tillable acres over 20 years at 5% interest).
It is nobody's intention for this farm to create hardship on the boys who have run the farm for their father since 1992.
- In 1992, all three farms were valued at a total of $800,000. Today, appraising at $5 million represents a growth over 28 years of approximately $4.2 million from 1992 appraised values.
It seems disrespectful to be arguing over a $200,000 difference on a $4.2 million appreciated inheritance that the boys worked to build without compensation.
- From 1972-75 land doubled in value (the same time one of the boys decided to come home to farm). At that time, fueled by Neil Harl's Ag Econ class, the prevailing answer in the industry was to have the next generation “own” the growth. Otherwise, how could Mom and Dad afford to pay the next generation a commensurate wage for the equity that they were building?
- What would Dad do? How would he price family land for those who worked the farm and are willing to make the long-term commitment to subsidize the purchase of it (while risking a living at payments that will not cash flow)?
The transfer would have been done years ago if not for the capital gains that Mom and Dad would have faced if they sold the land to the boys when the time was right. At age 60, the boys are still renting this land. They should have had the opportunity to buy it long ago.
Ideally, these issues would have been communicated before death. In this case, they were disputed after the fact.
Thankfully, the family has agreed to terms and the four siblings (after the buy-out of the two nephews) are in the process of creating a family land entity to guide their family in the future without conflict.
My sincere hope is that you can proactively craft and communicate a land transition plan that will boomerang back to the family under terms that are viable for those who are willing and able to care for it as you have.
For 28 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.