When my parents died, they put their land in a trust until I’m age 65. They wanted to prevent my siblings from selling the land until I reached a “good retirement age.” They meant well, but it’s always a battle to negotiate rent with my brother, and my sister’s upset because she just wants cash. Age 65 is two short years away and I have no plans of retiring. I just wish I could’ve collateralized the trust assets for my expansion along the way. That said, the trust has kept the land intact so far. Now I’m starting to think about our children and the land my wife and I own. One of our four kids farms with us. He’ll never be able to buy out his siblings at these prices. I understand now why my folks did what they did. I was raised to believe family ground should never be sold. So, should we lock our land up in a trust too?
– Submitted by email from R.P.
Your parents did the best they could with the options they were given. However, it sounds like the trust that prohibited a sale still cost something. It has cost you strained relationships, limited expansion, and potential disruption when the trust expires. Your siblings pay the opportunity cost of not receiving a lump sum of cash to apply toward their goals, and their inheritance depends on your farming performance.
Let’s get to the heart of the problem. Are you trying to prevent your kids from ever selling inherited land? Or are you trying to prevent a land sale that bankrupts the farming heir? These are related, but completely different goals. The former requires detailed trust provisions to establish sensible operating rules while prohibiting a sale for a set amount of time. The latter has more to do with appropriate land valuation methods, distribution strategies, and financial preparation.
Consider this. If the land was held in a trust so it could never be sold, as you suggested, then it’s not a marketable asset to the public. It’s only worth the income it produces for the trust beneficiaries. So, let’s say you had $1 million of land in the trust that yielded 2.5% net rental return after property tax and insurance. That’s $25,000 of annual income. Now let’s say you replaced the land with $500,000 of cash that was invested at a 5% return. You’d achieve the same $25,000 annual income. If someone then wants out of this illiquid trust, should the exit price be the market value of the land or the income replacement value of the cash?
Starting with the premise that the land was never for sale changes the whole perspective. It’s no longer, “How can I afford to buy it?” but rather, “What’s the cost to exit?”
You may want to filter your farm succession strategies through this mind-set. You can create a cash-flowable exit strategy that allows the heirs to pursue their own interests on or off the farm. Or you can set up a trust with management rules to overcome those who have mutually exclusive goals.
Long-term trusts have their place. I’m just presenting a different way of looking at it. Commercial real estate and small businesses are sold every day as a function of their cash flow. Why not farms within a family? Rather than locking it up and throwing away the key, what if we simply priced the land like it’s not for sale?