In the United States, farm/ranch transition and estate planning experts and specialists are scattered across the nation. After visiting or listening to the decades of knowledge from all corners of the country, I was surprised to find nearly every expert in ranch transition said the same thing. “Fair is not Equal” in farm and ranch transitions. One expert stated, “The most unfair thing you can do to your children is to treat them all equally.”
The story of “the Little Red Hen” comes to my mind. The hen and her chick plant the seed, tend, harvest, grind, and bake the wheat into bread. Although the poultry clan ask other farm yard animals for help, the other animals refuse to participate. After smelling the hot crusty loaf, the other farm animals want to eat the bread they did not contribute to. Was it fair if the Little Red Hen chose to only share the bread with her chick? Was it fair? Was it equal?
Fair versus equal. This is one of the biggest headaches when planning your ranch transition. Fair versus equal could well be the reason you haven’t tackled your estate plan! How can you divide your ranch to fulfill your goals of your ranch to continue after you are gone, but also show your love and affection towards all your children? How will those affected by my estate plan react? There is no easy answer, but thinking over “fair versus equal” is essential for a good ranch transition and estate plan.
Dividing your estate into equal parts for your remaining heirs is simple and easy to calculate. Estate net profit divided by the number of kids equals what each heir receives.
The problem with “equal” planning is room isn’t allowed for the ranch to transition to the next generation. If the ranch is split up several ways, how economical is it for the successor of the ranch to buy out the others at market value? If the successor is relying on debt, will they be able to secure the loan at the bank? Is market value of ag land such that a “cow can pay” the mortgage? If a cow could pay for ground, ranch transition and estate planning would not hold the significance it does during high land prices and low ranch margins. A new set of economics is in place, and your ranch transition needs to take these trends into account.
The other problem with “equal” arises if a child or successor came back to the ranch. Most ranches are “asset rich and cash poor.” More than likely, the on-farm heir worked for less than fair market value, or contributed to the business growth and never received compensation because money was tight. Questions to ask yourself are “What are individuals contributing to the business?” and “Have I compensate for that?” and “What could I do to compensate?” If contributions went unpaid for several years, then spreadsheets are available to help calculate loss of interest or growth on those unpaid contributions.
In the story of the Little Red Hen, the moral we teach children is if you work hard, you will be rewarded. In agricultural estate planning- fair is more important than equal. This can be difficult to decide, but is key for the success of your ranch transition.
Remember: fair is not the same as equal.
by Bethany Johnston
NGLC Ranch Transition Task Manager