Perpetuation Planning: Putting a Value on the Farm

written by

Anonymous

posted on

July 21, 2020

By Todd Macfarlane 

KANOSH, Utah: I am continuing to beat the equal undivided distribution horse. Because equal undivided distribution is such a common practice in conventional estate planning, and because it creates such challenges for perpetuation of productive agricultural families and operations, whose assets and net worth are so often disproportionately tied up in land and real estate assets that is the specific issue I am going to address in this article. 

As a general rule, the biggest challenges associated with equal and undivided distribution typically revolve around land and real estate assets. But real estate markets go up and down. In just the past 10 years there have been wild swings in the real estate market, with location always being one of the most fundamental driving forces. 

The reality is, unless and/or until land is liquidated, sold and converted to cash, its realistic value should be based on what it is actually producing.In other words, even if land might be worth millions as a fully developed amusement park or residential subdivision, it certainly isn’t unless that is what actually happens. So a fundamental part of sound perpetuation planning involves putting a realistic, productive agricultural value on land that is intended to remain in agricultural production. I’m going to share a story to help illustrate this point. 

I recently had the good fortune of spending a week in Ohio Amish Country. I had the even bigger blessing of staying and spending essentially the whole time with an Amish family, who can serve as a role model for a lot of things, including stewardship and perpetuation planning. I’m changing their names to protect their identity and privacy. 

Jacob Weaver and his family live on a lovely 135 acre farm in Holmes County, Ohio, in the heart of Amish Country.  Until just a couple years ago it had been a dairy farm. Given the unbelievably strong lamb market in that area, they have recently converted to sheep production. That was our primary connection and what led me to their door. Jacob is the youngest child in a large Amish family, and stuck around to help his aging father milk the cows and run the dairy. At some point, they became partners in the dairy operation, and eventually Jacob completely took over.  Jacob’s father, Eli, is now 86 years old, and still lives on the farm in a separate house where Jacob and his wife and family help look after him (as is the custom among the Amish).  It is anticipated that in the not too distant future it will be decided which of Jacob’s own grown children will ultimately take over the farm from him, and there will then be four generations on the farm until Eli passes. 

Here’s the big point: Although Holmes County Ohio is definitely a rural area with a large, thriving Amish community, it’s a hopping, bustling place, with a thriving economy and high demand for farm land - which means that, given the priority Amish culture places on farming, you virtually never see a farm put on the conventional market and offered for sale.  When they do sell, it’s almost always by auction. The last farm that sold that way a year or so ago went for $60,000/acre. 

At this point, given the ultra prime location of Jacob’s farm, it would probably be worth at least $75,000/acre at auction. At this point, let’s do some math.  Although Jacob makes a pretty decent living running about 350 Dorset ewes on the farm, on paper, 135 acres at $75,000/acre, the farm is worthover ten million dollars. Ten million dollars - on paper! On that basis, it might be easy for Jacob’s siblings to look at Eli and Jacob as multi-millionaires, and want a piece of that action. But they’re not. Keeping everything in relative perspective, in accordance with the proverbial saying, Jacob and Eli are “land rich, but cash poor,” because until land is liquidated, sold and converted to cash, it is an illiquid asset. 

Here’s the even bigger point: regardless of hypothetical market value, unless the farm is sold and converted to cash, its reasonable value is based entirely on its productive agricultural capacity, and what it is actually producing.  Regardless of so-called “paper value,” until any asset is sold and converted to cash its value is purely hypothetical. 

Because Jacob Weaver and his family have no intention of ever selling their farm, what it might be worth on paper is  ssentially irrelevant.  Jacob’s siblings are all content that with Jacob and his children’s capable stewardship and operation, the family farm is both staying in the family, and in agricultural production. As well as the fact that their father, Eli, is living and being taken care of on the same farm he grew-up on, inherited, and operated for decades, with virtual certainty that future generations will continue to perpetuate that productive stewardship. Because none of Jacob’s siblings are expecting to get something for nothing, they don’t begrudge the fact that Jacob is inheriting a farm with a paper value of over 10 million dollars, which will be passed on to his children and grandchildren. 

In my opinion, that’s the way it should be. 

■  Todd Macfarlane is a rancher, writer and attorney. He and his family operate the Turkey Track Ranch, just outside Kanosh, Utah.

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