Transferring Your Farm or Ranch to the Next Generation

What Parents Can Do

Marsha Goetting
MSU Extension Family Economics Specialist

4/12/00 - BOZEMAN - This column is Part 5 of a five-part series on estate planning and transferring property found in the MSU Extension newsletter, Beef: Questions and Answers.

The farm/ranch business can be a fragile structure. The high risk nature of farming/ranching coupled with huge start-up costs and narrow margins dictate the need for safeguards to protect the farm/ranch heirs.

Farming/ranching children can protect themselves by carrying life insurance on the parents, by carrying risk insurance on the assets, and by seeking continued education to upgrade farm/ranch management skills. However, the parents also have to play a key role in protecting the financial vulnerability of the farming/ranching children.

It is not enough to say "You will be taken care of when we are gone." You need to take written action to make it happen. Farm/ranch heirs who are insecure as to their future in the business are unhappy, often indifferent, and easily alienated from farming/ranching.

Develop a Transfer Plan. Create a written transfer plan with the help and input of all parties involved, especially spouses and in-laws. Discuss it, sign it, and work from it, so everyone knows what is ahead. Then execute it and transfer some assets soon so farm/ ranch heirs can begin business and feel some pride of ownership.

Offer a Purchase Agreement. If you have not made any commitments as to sale of assets, a purchase option may be useful. The purchase option gives the buyer the right, but not the obligation, to buy term property at a later date. The agreement can involve land, buildings, livestock, or machinery. Price, terms to payment, and date of execution should be included. Because the agreement is binding on the spouse and off-farm/ranch heirs, it can give the farm/ranch heirs a definite and reasonable purchase price and terms for buying term assets. A purchase agreement may prevent the farming/ranching children from having to buy out off-farm/ranch heirs in an unsatisfactory lump sum after your death.

Provide Protection in Your Will or Living Trust. Make provisions for your farm/ranch heirs in your will or living trust. You may wish to establish provisions regarding how, when, at what price, under what terms, etc., the farm/ranch heirs can buy out the others.

Obtain Adequate Life Insurance. As a parent you have several insurance options:

• Carry enough insurance on yourself to provide adequate dollars at your death to pay off the non-farm/ranch heirs, leaving farm/ranch assets to farming/ranching children.

• Gift some money to your farm/ranch heirs during your lifetime for them to use to purchase life insurance on you. This would provide money to help buy out off-farm/ranch heirs at your death.

• If you are in debt, a life insurance policy on yourself can provide money for debt repayments and for estate tax obligations. This can relieve heirs of having to liquidate vital farm/ranch assets to pay off those expenses.

Pass On Your Farming/Ranching Know-How. Spend some quality time with your heirs during the transition years. Show them how to do the physical things. Share how you make decisions, who you listen to for advice and how you best use your resources. Pay particular attention to successes you have had in terms of financial matters. Pass on your wisdom. Share your "rules of thumb" and "things that went bad" and "what has always worked" philosophy.

Adapted with permission from Erlin J. Weness, Area Extension Educator, Farm Management, Minnesota Extension Service, University of Minnesota.

Send questions or comments to Goetting and Suzi Taylor, MSU Communications Services, Bozeman, MT 59717 or email them at taylor@montana.edu.

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