How long will it take your children to sell what has taken you a lifetime to put together? Parents usually know their children better than anyone, but sometimes when parents get too close, they can’t see clearly. Some parents are able to assess their family situation very accurately, and they are very realistic about personalities and tendencies and the parent’s estate plan often reflect those realities.
In regard to farmland, parents often feel pretty sure they know who would keep and who would sell land. Their observations are based on how children have valued money in the past and how they spend money in the present and the future generation. They may also assess spousal influences and other family-related issues.
Of course, there are times when there is some real sentiment but there are also times when there is fake sentiment. Sometimes there is confusion about the difference between a good memory on the farm versus a financial investment or someone’s livelihood.
So let’s talk about ROI. What is ROI? Of course, you know that it is Return On Investment. However, I often refer to ROI as Return On Inheritance. Seldom do parents assess their children based on math, but I can tell you that often children access their inheritance based on math.
Why would a child sell? Let’s keep it simple. Children either have money or they don’t. You are thinking “Well thanks, captain obvious.” Is it that simple? Yes, sometimes it is that simple.
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If your children have money, they probably have experienced a 10% or more return for quite a while in the stock market. So, if they get ground worth $12,000/acre and rent it to a farming sibling for $300/acre, how long will a 2.5% return make them happy? Oh yes, I know there’s appreciation in land, but unless you sell it, appreciation doesn’t pay the bills any more than “thanks” pays for gas when someone gives you a ride. I also understand there are good memories of walking through woods or skipping rocks on the pond, but after years and years of not coming back to do those things, will that be enough to keep them from selling a memory? I don’t think so.
What if you have children who don’t have much money. If they inherit 200 acres and net $250/acre after paying property tax, will $50,000/year of rental income from a sibling be what they want or would they rather sell for $12,000/acre and net $2.4 million with no tax since the land received a stepped-up basis? Would they entertain the thought of building a $1 million house they’ve always dreamed of and still have $1.4 million left over to invest and maybe average 6% on that to have an $84,000 annual income while living in a $1 million house compared to living in their existing house with $50,000 of rental income? This is the math your children will be doing. This is the time when money talks more than sentiment. This is not about what you would do; this is about what they would do or how they would look at it.
This is the time when all kinds of conversations with an knowledgeable adviser should come up about discounts, options to buy, options to rent and valuations, and all types of planning tools should come into play. Parents need to face reality about the math their children will be doing. Of course, some non-farming heirs may be truly be happy with land ownership and never even think about selling or commanding the highest rent from a farming heir. But for others, how long will it take them to decide to sell? Not nearly as long as it took for you to pay for it.
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.
