Stuck between 'They'll get along' and 'Let 'em fight it out'

Problem: What if parents refuse to make an estate plan?

My parents are in their 70s and own 1,200 acres. I have two off-farm siblings. Every time I talk about farm succession, Mom says, “I’m sure everyone will just get along.” Dad jokes, “Just let ’em fight it out!” Dad suffered a heart attack last spring, and we’re not laughing anymore. Our livelihood and our child’s future are at stake. Land is around $14,000 per acre. For me, payments over $400 per acre are risky long term, $500 crushes all profit, and $600 requires major subsidization. I’m worried. How do I get them to stop being complacent? – Submitted by email from C.A.

Solution:

I’m sorry about your dad’s health, C.A. I hope he’s recovering well. I’ve seen many farm heirs express the same frustration. Some parents fail to plan because they don’t know their options or who to trust. Some struggle when facing their own mortality or confronting tough decisions. Most simply struggle to articulate their wishes and fear unintentionally upsetting someone. They’re scared to do the wrong thing, so they do nothing, which is exactly the wrong thing! 

Let’s look at what must happen for their default plan to work after estate distribution.

For your $400 per acre cash flow to work toward rent, your siblings must:

• Be satisfied with net income returns under 3% (well below current inflation rates)
• Not cave when investment advisers suggest selling land for traditional investments
• Enjoy watching you pursue your goals while lacking their $5.6 million in liquidity to pursue their own
• Avoid a death, divorce, or health situation that could jeopardize the farm

For $400 per acre cash flow to work toward your $11.2 million buyout, you must:

• Find bank financing with only 33% equity
• Stretch amortization to 100 years at 4.25%
• Or find a negative-interest rate loan; even at 0% interest, principal payments are $467 per acre over 20 years
• Or write a $5.7 million down payment check and finance the balance on a 20- year, 6% note
• Or have land fall back to $6,875 per acre and finance the buyout on a 20-year, 6% note

Also, Congress must extend the current estate tax limit before 2026. Otherwise, it reverts to $5 million plus inflation, which could significantly impact estate losses. Does this sound ridiculous? So does not having a plan. I honestly don’t say these things to depress you. I say them to impress upon you (and your parents!) the need for proactive strategies.

When approaching your parents:

• Be empathetic and respectful. You’ll be making these difficult decisions someday.
• Cast a vision. What could a good plan do for the family? What happens with no plan?
• Learn the options and ask questions that lead to awareness. Don’t just tell them.
• Consider bringing siblings into the discussion if that would encourage progress.
• Work with objective professionals to guide and simplify decision-making.

Otherwise, you’ll need to take a hard look at what is and isn’t in your control and move forward accordingly. Proactive planning creates a path for everyone to get along as your mom hopes. It also creates a viable exit strategy if everyone fights like your dad suggests.

Mark McLaughlin is an associate with Farm Financial Strategies and a co-owner of Farm Estate GPS in Ankeny, Iowa. He grew up on a family farm near Defiance, Iowa, and shares in the fifth generation of ownership. McLaughlin has helped farm families across the Midwest develop their farm succession strategies for the last 18 years. Find an online resource to help families understand their options and take control of their farm succession strategies at FarmEstateGPS.com.