Oklahoma State University created a model that compares business and estate transition strategies and the probability of success. The results of the study show that dividing the assets equally among all heirs has the lowest success rate, and farms using that method usually don’t continue on to the next generation.
“If the goal is to keep the farm business in the family, then we know that an equal distribution of the farm assets is not feasible,” said Heather Schlesser, Marathon County Extension educator. “The owner generation must take responsibility for communicating the goals and justify why there is this unequal distribution,” said the Wisconsin-based extension agent.
Farmers have three types of assets:
- Retirement
- Business
- Inheritance
One consideration is if farmer owners can fill the inheritance bucket along with the first two.
“Careful and early succession planning and honest communication is required to determine the farm’s capacity to fill the three buckets,” said Schlesser.
The difficulty with dividing an inheritance mainly comes from what it may mean to people.
“Inheritance can have a symbolic significance within a family’s culture,” Schlesser said during University of Wisconsin-Extension’s program “Is Fair Equal?
“It might symbolize trust, love, power, family, rituals, or even history. Ultimately, as parents, we strive to treat our children equally . . . we love them all equally, and we want them to know that. Therefore, when our children perceive their inheritance as a direct indicator of how much we love them, it really makes it hard to divide those farm assets.”
With all the emotional and financial difficulty involved, what is the best way to divide assets and keep harmony among heirs?
- Discuss and implement fairness rules that help children better understand distribution of assets.
- Don’t leave out off-farm assets like vacation homes or property in the discussion.
- Be honest about the farm’s actual financial capacity to finance business and personal goals.
- Hold regularly scheduled family meetings with open communication.
“The extent to which this strategy succeeds depends on if the siblings get along,” Schlesser said. “The more the off-farm heir understands about the decision-making process, the easier it is for them to see the fairness of the decision.”
Life insurance is also a tool that may be used to balance inheritance issues within families. For instance, owners might be able to use their life insurance to make nonfarm heirs beneficiaries, or owners may make on-farm heirs beneficiaries so they can use that money to purchase assets from their siblings.
“This may not be a be-all, end-all strategy,” said Joy Kirkpatrick from the University of Wisconsin Center for Dairy Profitability, “but it may be used in combination with other strategies.”
For farmers interested in working on succession issues, the University of Wisconsin-Extension offers resources and information on their site.
