Part 1 of Livelihood and Legacy: Fair vs. Equal in the Family Farm
By Amanda Smith
Farming is really more than a livelihood, it is a lifestyle…and for those who have been blessed to grow up within a family farm, it is very much a legacy you wish to protect. The desire to protect the family farm is inherent, the process by which that is accomplished, however, can be daunting and cumbersome. Unfortunately, an overwhelming majority of family farm operations wait until tragedy strikes to approach this conversation…resulting in partitioned land, broken relationships, and legacies left in the hands of the courts. This series of articles will be aimed at giving practical strategies and solutions for addressing the personal, business, and tax implications of protecting and preserving the family farm.
To make any attempt to create a plan for transitioning a farming operation to the next generation, or even to disperse the assets of an operation that has reaching the end of its lifespan, requires first understanding the dynamics of your family itself. How many children are involved? Which, if any of those children, have an interest in the management of the farm, and are those who have an interested qualified and capable of doing so? Can the current size and scale of the operation effectively support the families contained within it? How does your family define fair, and does fair mean equal?
Classically, there are two definitions of fairness. The Roman definition lends towards “giving each what is due to them”. The Greek settles on “fair and fair alike”. If the Greek perspective drives the decision-making of the current farming generation each sibling, regardless of their education, family situation, and contribution to the farm has an equal claim to future management and distributions. The Roman definition says that while no heir has less value than another, the management and profitability of net income should be allocated relative to each’s demonstrated dedication to the business.
The August 2017 Purdue Agriculture Economics Report takes a closer look at how family businesses define fairness, and how their viewpoint of fair relates to profitability. According to the survey, family businesses can choose one of four definitions of fair. The can choose to treat each family member according to their needs, according to their contribution, the same regardless of need or contribution, or the can simple choose not to define fairness at all.
The results of the survey conclude that coming to a decision about fair, or choosing not to, most definitely has an impact on the firm’s profitability. There were two different surveys conducted, with varying differences in what percentage of firms define fairness in each of the four possible ways, but the profitability question was raised in one survey, and its results are eye-opening.
Families who choose to treat each member according to their contribution reported the highest incomes. Because they likely focus on what is best for the business, they are able to maximize profitability. This observation could conclude that they choose managers according to their ability to lead, and award responsibility and compensation accordingly. This does translate to higher levels to tension between family members when there is resentment towards this method of defining fair.
Conversely, when family firms choose fairness as treating each according to their needs, profitability takes a back seat to compassion, and business profits often suffer. Decisions are often made based on the needs of the individual family member, rather than the best interests of the firm.
Regardless of which definition you choose, based on your own family dynamics, there are consequences to that decision. Once the choice is made, your business structure, plan for transitioning to the next generation, and methods to reduce tax liability can be addressed. In the articles to come we will specifically address business structure options and their general benefits and challenges, how each impacts transition to the next generation, and the tools within succession planning that can reduce, if not eliminate tax liability.