Senior Partners - 4

INDIANOLA, Iowa (DTN) -- The drawback to land ownership is it's not cash and you can't spend it. On the other hand, devoted farm landowners like Doug Rupp of Stryker, Ohio, think that negative is also land ownership's most redeeming feature.

Rupp and his wife, Nancy, spent their adult life accumulating farmland on his high school teacher's salary, buying Ohio properties even when farmland went out of fashion in the 1980s and traveling as far as South America to scout deals. Now their 1,300 acres are a sizable investment he does not want his kids or grandkids to squander.

"I've seen that play out over and over. Farmers scrimp and save, building equity through farmland with the hope that it would continue to build wealth for future generations. But when they give it to heirs who haven't earned it and no longer work on the farm, it's a lot harder for them to hold onto," said Rupp.

If your goal is to protect your heirs from selling the golden goose, there are steps you can take to keep the land in the family for generations to come.

CONVINCE HEIRS LAND IS A GOOD INVESTMENT

"Farmland values have their ups and downs. I'm not saying we're not near a top in the land market," Rupp said. "In fact, land values are not likely to hold at these levels. But if you track farmland over 100 years, it has done at least as well as the equity markets and has had a compounded annual return of at least 7%." Over time, it has also been a good inflation hedge.

Although they are illiquid, operating profits or rents provide a steady income stream. "I want my children to enjoy the return off the land and hopefully build on it," said Rupp. "But you don't do your children or grandchildren any favors by giving them an asset they can convert to a large amount of cash. They may not have the discipline to invest wisely. Children who are given a lot become weaker, not stronger. It's like winning the lottery. Often, 10 years later, they are out of money."

GIVE THEM SKIN IN THE GAME

Ken Gorden of Decatur, Ill., pondered the question of how to keep his farm legacy going since none of his children or grandchildren wanted to farm. In 1995, he pulled everyone together for a family meeting and met with the farm manager and family attorney. He made his heirs shareholders in a Subchapter S corporation that owned the farm.

Even with less than 10% ownership, the grandchildren now in their 20s and 30s receive farm manager reports and feel like they have a vested interest in the farm, explained Ken's son, Paul, who lives in Bloomington, Ill.

"Now whenever we're together, we talk about the farm, the cost of fuel, the weather, corn prices, etc. It pleases me as it pleases my dad (who celebrated his 91st birthday) to see them interested in what's happening on the farm," said Paul. "They see the value in owning farmland and want the farm to grow."

COMMUNICATE THE LEGACY

Owning a piece of family history has value, but communicating that family legacy is key. "It's important for the family patriarch or matriarch to tell their children and grandchildren this is what I put together and why I did it," advised Brent Bidner, farm manager with Hertz Farm Management's Monticello, Ill., office. "It's important for them to hear the emotion in the telling of the stories, rather than to read it in the will or trust document."

Kevin Mills, a CPA estate planning expert with the consulting firm Kennedy and Coe in Salina, Kan., agreed. "The more the kids and grandkids can see Grandpa's pride in the land and hear him say, 'I'd really like to see this stay in the family,' the more that goes a long way in passing on his values," Mills said.

Near Clarksville, Iowa, descendants of John Heery got together in 2011 to tour the farms still owned by the family. All the farms are century farms and the homesteaded farm dates back to 1852. Eighteen family members from seven states entertained each other with family stories and history.

One of the farms the family owns meanders along the river for more than a mile and a half. "It's the prettiest farm, with timber, the river and the expanse of fields," said John Kreutzer. "If you picture prairie grass instead of corn and soybeans, you can almost envision what your great-great-grandfather saw on that very spot."

MAKE LAND EXITS DIFFICULT

Often the tax consequences of a large sale are disincentive enough to sell. But formal buy-sell agreements can make a sale even less attractive, if your goal is to keep the farm together.

Mills advised setting up a partnership that makes it less lucrative for a partner to cash out.

"First of all, you don't want someone as a partner if they don't want to be," said Mills. As your descendants multiply, you'll increase the risk of differences of opinion or investment philosophies. So you'll need an exit plan that doesn't jeopardize the land ownership for the remaining partners.

"If everyone agrees, you can do whatever you want, such as buy the partner out for $100,000 cash now and be done with it," said Mills. "However, the exiting partner or shareholder cannot say how they will be bought out."

In the buy-sell agreement, "you can stipulate how the partnership interests are valued. There could be a steep discount in price for a partnership interest that is limited in control and marketability," noted Mills. "The exiting partner may only get 60 to 80 cents on the dollar."

You can also stretch the buy-out over a 15-year period, or whatever term you want. "I call the combination of the longer payout and lower value a 'tax,'" said Mills. "If you choose to leave, you are not going to get an attractive buy-out."

Also, you can restrict ownership of the shares to existing partners or family members, Mills added. That keeps the land within the family.

"Many of our clients have the non-voting interest of the land partnership owned by trusts so that the land stays protected for future generations including protection from divorce and estate tax exposure," Mills said.

Ohio farmer Rupp believes legacies can be a life lesson. "We've always lived below our means and learned that was the way to build wealth. It's a good lesson for our kids to learn, also."

***

Editor's Note: DTN's on-going Senior Partners series examines the financial, legal and emotional hurdles families face as they transition farm ownership from the senior to junior partners. To read other features in the package and to find information about DTN's estate planning webinar, go to DTN/The Progressive Farmer In-Depth at http://www.dtn.com/…

Elizabeth Williams can be reached at elizabeth.williams@telventdtn.com

(MZT/ES/AG/CZ)

Copyright 2013 DTN/The Progressive Farmer. All rights reserved.