John Phipps' Ugly Truth about Succession Planning: Unearned Wealth Brings Out the Worst in Everybody

A U.S. Farm Report viewer emailed the following question to John Phipps:

“The practical reasons why an estate would be divided equally between adult children is easily understood. But the sense of entitlement heirs often times have seems extremely presumptive. While they may have opinions as to how the estate is distributed it is far from being their decision. There are reasons practical (an heir with substance abuse), emotional (an heir who is simply more involved), financial (an heir significantly disadvantaged through no fault of their own), et cetera as to why the division of assets would not be equal. It seems to border on if not to cross the line of outright rudeness to have the temerity to interject themselves into the process.” 

The attitudes of heirs have been a complaint by older generations for centuries. I talked about these problems two years ago and will link to those commentaries and other thoughts if you go to the web version of this commentary.

My observation this issue has boiled down to this: Unearned wealth brings out the worst in everybody. Even the prospect of free money can alter our personalities and decisions. Estates may also be eternal problems because they are essentially efforts to continue control possessions and even lives after your death. Framed that way, it becomes a philosophical, or even religious controversy.

As a result of my years of surviving and writing about farm estates, taxes, and fairness, I have heard many stories about unfortunate outcomes and lingering family divisions. It may be because successful estate settlements are relatively forgettable for the participants. Or it may be because they are rarer than. I think. Rural lawyers may be able to make a more specific estimate the ratio of difficult resolutions to amicable settlements. It has also struck me that because of increased longevity most dispositions of wealth are made by very old people to merely old people, the changes in our memories and attitudes at those ages make compromise more difficult.

One thing I do believe outlining in your own words what you want to happen and why long before you think it’s needed. Today that could be easily recorded, shared, and replayed preventing many issues arising later from differing memories. While you cannot dictate how your heirs should feel, you can explain how you feel about your decisions.

John talked about this topic twice last year on U.S. Farm Report: 

John Phipps: Here's the Biggest Issue Farm Families Face When Succession Planning

John Phipps: Why Respect is the Key Factor in Transitioning a Farm to Next Generation

More Transition Talk 

From July 2020: Transition Misconceptions

We received a letter from a farm couple in Illinois who ask:

“Can you address the subject of planning for the next generation in farming?”

They attached a letter with a number of issues. This is a topic that generates thousands of words of education and advice in the media every year. I claim no expertise in this area, just experience from a handful of transitions and estates I have been involved with. I will pick a couple of points from their correspondence to comment on. This week, I’d like to look at this common misunderstanding.

“Keeping the Family Farm operable and sweat equity mean nothing to the non-farming family members, money is what it’s all about.”

A few words about sweat equity. First of all, equity is inextricably attached to ownership. The idea of sweat equity is an effort as a way to get around this truth. A good example is a couple buying an old house, working nights and weekends to make renovations. The house is then appraised for more than they paid. That added value – minus their materials cost would be their “sweat” equity, which is actually just the same as plain old equity. If they had been renting the house, all that increased value would belong to the owner, unless a prior agreement had been reached. Young farmers often come back to the farm and assume that their hard work helping improve the operation somehow gets added into some account in their favor. It does not, as many discover when estates are settled. Regardless of good intentions or assumptions, unless your name is on the deed, all the good faith effort in the world has no legal or even logical basis without ownership. After all, a good employee can also increase the value of a farm in the same way. If returnees accept low compensation with the hopes of some sweat equity credit, they will be disappointed. A financial claim based on sweat equity would be impossible to quantify and very difficult to justify to other heirs. This is the reason if young farmers have no ownership share, it is imperative they receive actual compensation that is acceptable on its own. – that they are paid a wage that they think is fair. That said, there are other forms of compensation for young farmers from the farm, some of them obvious, like housing often, possibly a vehicle, and so forth. But there are also benefits young farmers often do not recognize or value, but off-farm siblings and heirs do. I’ll talk about them next week, but for this week remember if there is no ownership, there is no equity of any kind.

From July 2020: Transition Misconceptions 2

Last week I shared a letter about problem of “sweat equity”. Today I’ll share some misperceptions between heirs on and off the farm. I am not saying they are right or wrong.

Things I’ve heard farm heirs say about non-farm heirs.

• Non-farmers don’t value keeping the farm in the family. This may be true but after a generation passes multiple new families are formed from the heirs. Keeping a farm in the family is better seen as keeping it in the farmer family.
• Non-farmers just want money. Money is how we measure wealth, so even those who want land essentially want money too.
• Non-farmers don’t appreciate how hard on-farm family have worked. Non-farmers have probably worked hard too. Farmers often misjudge the career effort of other work.
• Farms are isolated with many disadvantages – from cable TV to restaurants. However, we often undervalue space, freedom of action, and control of time.
• Non-farmers don’t realize how little money there is in farming. Even if true, this fact may simply encourage converting land to higher-return investments rather than empathy for the farming heir.

Now let’s look the other way – what non-farm heirs might think.

• Farm heirs have enjoyed job security without the hassles of bad bosses, transfers, layoffs, toxic co-workers, and rigid schedules. In fact, control of time – being able to attend a track meet without permission from your boss – can trigger intense envy.
• Farmers have time with parents and are often receive casual benefits as a result, like childcare, which is a significant burden off the farm.
• Non-farmers have may have received little or no wealth from the farm. Compensation from farming is technically money from the farm, regardless of being earned.
• Farmers have room to live, get to work outside, and be with family even at work. This lifestyle may be a happy childhood memory that is missed and valued by non-farmers.
• Farmers do fun work. We brag about it all the time on social media. Off-farm heirs may dislike their work, fueling resentment.

All of these views have valid aspects but farming heirs have much more at risk in resolving these differences. Experience has taught me to take non-farmer complaints very seriously, and to consider their point of view all the time you farm, not just at transition.

Next week, how to be fair and still have farm continuity. Spoiler alert: it’s really hard.

My commentaries are posted as articles on AgWeb. This feedback is from there, concerning the misperceptions between farm and non-farm heirs. I have withheld the name.

“I find it interesting that Mr. Phipps has reasons all farm heirs’ views are wrong. But he has no reasons why non-farm heirs’ views are wrong.
As many of us has seen a farmer wanting to keep farming but can't because the non-farm heirs want their money. This is one of the leading things causing rural America to loss its population. We need laws to help keep farmers farming and not making sure that the non-farm heirs are treated fairly. This should have been done decades ago.”

I find these assertions puzzling and troubling, but certainly not uncommon. To begin with, the both-sideism – the conviction that if there are two sides to any issue they both have equal validity or in this case equal flaws. The GMO debate is another example. Our audience is composed of far more potential farm heirs than non-farm, so I was trying in three minutes to give them a heads-up about issues I have seen and how they do or do not make sense. In onse sense the writer is correct. I do think farm heirs are driven by motivated reasoning to illogical and unsupportable positions far more than are non-farm heirs.

Second, farmers make up a tiny percent of rural population. Even accounting for economic follow-on losses, rural America loses far more population due to the decline in retail from competitors like Amazon, fewer births due to younger generations leaving, and the big one that starting the decline off: the Interstate System.

Finally, the idea of laws “not-making sure that the non-farm heirs are treated fairly” is a frankly breath-taking assertion of entitlement. This comment was written before I explained how old primogeniture laws did exactly that, and I don’t think even farmers are lobbying to bring back such legislation. Keeping the farm together for the benefit on one heir at the expense of others is repugnant to those of us fortunate to have multiple offspring whom we cherish without measure. Our fear is not that some acreage monument to our success is diminished, but that they will infer from their inheritances how much we loved each of them.

JW 7 Aug 20 transition problems 3 fairness

Until the early 20th century in England it was illegal to bequeath your estate to anyone other than the oldest son. This practice, called primogeniture, was customary all around the world. I always assumed it was because people were until then unenlightened, caring less about fairness, and very little about women. I’m not so sure anymore. Of course, I don’t agree with primogeniture, but I can see how it became common practice: it eliminated most of the headaches and heartaches of estate planning today. Nobody could blame anybody – it was the law. Families have tried alternate ways to be fair and keep estates whole, usually failed and just settled for the least worst. While much has changed, that nearly impossible task has not. There are a few obvious ways to be fair and keep farms together: have only one heir or have a pile of money in addition to the farm, for examples. Those situations are rare. Virtually all farm estate outcomes will compromise fairness and farm continuity, perhaps settling for equal dissatisfaction. It all hinges on how a family defines “fair”. If this represents fairness and this mug keeping the farm together, the distance between them is how hard it will be for a family to transition successfully. If fairness is defined as equality, that distance can grow significantly. However, if fairness is defined as “something we can all live with”, the odds of finding a solution are much greater. Note both mugs have to move for that to happen. The greater the distance between equality and farm continuity, the more important it is to work to find that acceptable compromise. When estate plans are dictated by the older generation, there may not be any chance to discover that “something we can all live with” solution. It can happen after the older generation passes, but it is a heck of lot easier to find before that time. It can be an emotionally exhausting effort that is easy to postpone. Until you can’t. Once you have been through such a negotiation, you may have a little better understanding of why families have used custom and law to take this decision out of their hands. In summary, sweat equity is not a thing, on- and off-farm heirs often suffer from inaccurate perceptions of each other, and nobody has found an easy way to preserve both estates and families. When we talk about how hard we work on the farm, transition planning should be our top example.