It is common (and recommended) for all family members to be on the same page with the plans for how farmland and other assets are to be handled after the death of a loved one. However, one arrangement that is not as talked about, but may be a possibility for some landowners, is giving their tenant a written option to buy the farmland after a death. An recent article on the DTN/Progressive Farmer website (Pre-Death Planning for Landlords) addresses this topic. According to the article, which quotes statistics from Iowa State University, as of 2007 approximately 55% of all farmland owners in Iowa were over the age of 65, and 28% were over the age of 75. I think it is a safe bet that you will see similar statistics in most states across the Midwest. What those numbers tell us is that a majority of the farmland in the Midwest is going to be changing hands in the next 25 – 35 years. The majority of that acreage will be passed down and remain family-owned, but a certain percentage will be sold. Unfortunately, the fact of the matter is that a sizable portion of the business in our industry comes from death. Mom and dad have both passed, the children have moved off the farm and gotten jobs in other sectors, and are not interested in owning farmland. Once you add in multiple siblings, the decision to sell becomes more clear as it is easier to split cash than land.
As the article mentions, however, in some cases, passing it down to family members may not be the only option. The scenario mentioned in the article relates to farms that have capital improvements that were at least partially funded by the tenant. The tenant has more than likely been farming the ground for some time and both parties have built up a certain level of trust for each other. If an option-to-purchase is included in the rental agreement, it can benefit both sides under the right conditions. It gives the tenant peace of mind that they can continue to invest in the property (whether it be irrigation pivots, drainage tile, fertilizer, etc.) knowing that they will have the right to stay on the farm, should they want it. For landlords, they can be comfortable knowing who the property will be going to. The main risk from the standpoint of the landowner (and/or their heris) is, how do you know if the price the tenant pays is truly the market value? You can have an appraisal done, but ultimately that is the opinion of one person on one day. When you are involved in the kind of active market we have seen the last 12 months, with farms appreciating in value by up to 30%, an owner may be leaving money on the table. For some people, knowing that the ground is going to stay with someone they know overrides the chance money will be left on the table.
Ultimately, when dealing in succession plans, it is recommended that you sot down with you attorney to make sure that what you want to happen is actually in writing. While a simple farm rental lease can be done without the aid of an attorney (Read the Loranda blog post from last week for more information on leases), once you start adding in items such as options-to-purchase that can affect the long-term outlook of the farm, it is probably best to sit down with your attorney to make sure nothing is being overlooked.
