There are still many small family farms in Calvert and Anne Arundel counties, many farmed by generations in the same family. However, if the owners of these family farms want to keep them as farms, they need to take specific action before they die to do that.
Suppose a farmer who is a widower has five children, a few hundred acres that he wants to keep in agriculture and dies without a will. Dying intestate (without a will) means the law gets to decide who gets the property and how. In this case, the property goes in equal shares to the children as “tenants in common.”
What does that mean? It means each one of the children has the right to sell off their share of the property. If four out of the five want to keep the farm as a farm, they have to figure out a way of buying out the fifth. Often, problems arise not with the children but with their spouses who have no attachment to the land.
Let’s say the farmer has a will that leaves his property to his children in equal shares. Will that help? No. The equal shares will go to the children as tenants in common unless the will makes it clear that the farm goes to the children as joint tenants with rights of survivorship. That means that each child’s share belongs also to the surviving children so that if a child dies, his or her share goes to brothers and sisters. That keeps the farm in the family but doesn’t provide for grandchildren to inherit. If the farmer leaves the property to his children “per stirpes,” then if one child is deceased and has children, those children, the grandchildren, step up to take the place of their deceased parent. This does provide for grandchildren. But, when all the initial generation dies and the grandchildren take, will they want to keep farming?
What should the farmer to do to keep the farm as a farm for his children and successive generations?
If the farm is deeded into a limited liability company (LLC) or a corporation, the farmer can take back membership interests or shares in the corporation and can pass those along to his children when he dies. The operating agreement of the LLC can address how the farmer wants the property to be handled after his death. Since the property is inside a corporate structure, there is no threat of selling it off to third parties unless at least two-thirds of the shareholders agree or all agree depending on what the operating agreement says. This prevents one child from forcing the sale of the property. Can the membership interests be passed along to successive generations. Yes. How? Of course, each child could have a will to pass their interest along to their own children, but the better way is to have the operating agreement address the issue by saying that upon the death of a shareholder, there is no opportunity to sell the shares to a third party, but only back to the corporation or to another shareholder or, if all shareholders agree, the property can be passed to direct heirs of the deceased child.
If shares are sold back to the corporation, where does the corporation get the money to pay for them? And, how much does the corporation pay—what is the value of the farm?
The corporation can come up with cash through insurance proceeds. The farm can buy insurance policies on all the children. When a child dies, his or her shares are purchased by the corporation with insurance proceeds.
The operating agreement should also address valuation. In the operating agreement, valuation can be based on tax assessed value, not market value. Market value might unduly inflate the value of the farm since it can take into account rights to subdivide, etc.
Finally, the operating agreement of the corporation can address the most important issues. Namely, who will manage the farm, what farm maintenance is to occur and other important issues relating to farm operations.
In the past, farmers may have relied on the good will of their children to keep the farm as a farm. But, these days, good will needs to be replaced with common sense. If the farmer wants to keep the farm as a farm for future generations, the farmer must take concrete steps to ensure that plan.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them” (2013 ebook download available at LegalStriegel.com.). Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.