farm transition

The Use of Windfall Gain Agreements in Farm Transition Planning

farm transition

By: Jennifer Denchak Wetzel, Esq.

The importance of farm transition planning has become increasingly understood and accepted by the agricultural community.  The topic is regularly discussed in agricultural literature as well as through live seminars.  Yet, despite widespread awareness and adoption of the concept, there can still be a general reluctance, for a number of different reasons, to approach and tackle the issue.

Many times, the topic is ignored because it reminds the parent generation of their mortality.  The parent generation may also have a resistance to losing control and may operate under the assumption that no one could ever run the farm business as well as they have run it.  Sometimes there just is not enough of time to handle the farming obligations, let alone deal with this complex and time-consuming issue.

Another major deterrent is not knowing how to handle the “non-farm child” fairly.  In most farm transitions, the farm child receives the farm assets by gift or through a bargain sale at less than the fair market value.  This arrangement may reflect the sweat equity that has been contributed by the farm child to the farm operation over the years, as well as reflect the maximum price that can be paid by the farm child in order for the business to stay viable.  After the farm assets are transferred, few assets often remain for distribution to the non-farm child.

If your reluctance to approach this topic stems from your uncertainty regarding the treatment of the non-farm child, a possible solution is to add conditions to any transfer to the farm child requiring him/her to share a portion of the “windfall gain” that is recognized by the farm child if he/she sells or transfers all or a portion of the farm assets outside of the ordinary course of the farm business, or discontinues the farming operation, within a set period of time.  For example, for a period of ten (10) years from the date the farm child receives the farm real estate, he/she could be made to share a portion (often a higher amount initially and then decreasing over time) of the net profit he/she receives from the sale of the farm real estate with the parents and/or the non-farm child.  The time period and sharing percentage can be adjusted to fit each family’s circumstances, and parents can provide for exceptions to the windfall gain sharing requirement, such as the leasing of oil and gas rights and/or the sale of agricultural conservation easements, among others.

An agreement to share windfall gain may be part of the solution to guaranteeing fair treatment amongst your children, and may be the peace of mind needed to allow you to begin the farm transition process.

The attorneys at Mette, Evans & Woodside are available to counsel and assist you with the development of an Agreement-Sharing of Windfall Gain, as well as with all other aspects of your farm transition plan.