In the last column, I mentioned that I would discuss reviewing valuation methods for farm estate buyouts or equalization. Many things need to be coordinated in an estate plan. Two of those items include who is getting the assets and how they will be valued. I’ve included a chart that I will reference for this article. This publication represents a large range of land values so you may need to adjust for some of the values specific to your area. Let’s compare four different ways to value the land:
Use fair market value. That amount will be determined by an appraisal when someone passes away. This can be a scary option. The words “fair market value” may be less fair than the name would suggest. In our area, there’s still ground between $8,000-$10,000/acre. That number may not be fair to the farming heir because $7 corn got land to that price and now corn is less than half that price. In the 1980s, when the value of land collapsed and went down to $600/acre, that may not have been fair the other way. Look at the chart for $9,000 land. (For the chart, I assumed 5% for 20 years for all payments) The payment is $720/acre and that does not cash flow. Dad and Mom maybe took 40 years to accumulate that land and now to refinance it all at today’s prices would be nearly impossible.
The second option is a percentage of fair market value. In over 20 years of doing this, I can say people who used this option, the range has been from 30-95% of FMV, with the most common being 70-80%. That sounds good but If you have $9,000 ground and a 25% discount, you will have a land payment of $540/acre. Remember that payment will be around for 20 more years after the parents die. Ouch! If it doesn’t cash flow, do you really have a viable plan?
- The third option is simply setting a price. Some parents and farming heirs say “I don’t like a moving target, let’s set a number we think will work”. For this example, I chose $4,000, which would relate to a $320 payment. Not a cakewalk but that sounds a little better and it’s something that could be planned for. Someone could complain it doesn’t take into effect inflation or other things that may or may not occur. I think it’s ironic when you buy land from a third party, everyone is willing to set a price, but when a price is set within the family, somehow setting a price is not fair?
- The fourth option is using special use valuation. Some may have heard of IRS Code 2032A, which uses the five-year average rent rate and subtracts the property tax for your area and divides that total by a factor, which is currently 0.0468. For example, land that has a $250 cash rent average and $30/acre property tax would be valued at $4,701/acre. However, if rent goes up or down, the price will adjust to reflect what the land is worth for farming purposes.
There are many ways people use these different ideas and combinations of these ideas with “not to exceed” price clauses that can reflect your best attempt to accomplish the goals you have. I should also note that we have a website called www.farmestategps.com Check that out for additional tips, tools and strategies online that could be very helpful to you in the future.
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Myron Friesen is the co-owner of Farm Financial Strategies Inc. in Osage, Iowa. He can be contacted at 866-524-3636 or friesen@farmestate.com.
