Navigating farm succession without an heir

Farmers and ranchers who may not have an heir willing to take on the operation but may have a tenant interested in continuing the operation have several choices, according to Jessica Groskopf with the University of Nebraska-Lincoln.

“Every farm needs an estate plan, but not every farm needs a succession plan,” she said. “Farmers may want the operation to continue through the tenant.”

When constructing wills and other documents outlining what should be done with the farm ground, there are several options to include tenants. Lease agreements, options to buy, and preemptive rights can all be considered.

“Lease agreements must be in writing and have the transfer of property binding on the heirs. Amendments must be in writing, and there should be a termination clause,” Groskopf explained. “But if their heirs plan to continue to lease to the tenant, it’s important to consider if the heirs have the ability, skills, and funding to maintain the property. Things like paying property taxes, irrigation maintenance, and other repairs must be addressed. Also, are the heirs close enough to check in on the property?”

In the case that the heirs are not able to manage a lease agreement, an “option to buy” may be something the landowner wants to include for the tenant.

“The spouse may not be ready to handle leasing long term, but the farmer wants more control over who the property is sold to,” Groskopf said. “In that case, the ‘option to buy’ allows the tenant the right to buy, but they are not obligated to buy. It would also include a price or price formula for the land. The ‘option to buy’ can force the sale of the land to the tenant and would include a timeframe, price, when the agreement applies and when the transfer will be funded.”

Another tool that farmers and ranchers can include in their final documents are “preemptive rights” for the tenant that gives them the option to buy but does not force the sale or define the price.

A “first right of refusal” is another option that allows the tenant the ability to match any third party offer before the sale is finalized but does not force the sale and does not define the price.

When considering these tools, Groskopf said it’s important to have a good team of professionals advising the creation of documents, including a tax professional, a lawyer, a banker and a financial planner.

“Your situation is unique and not every tool in the toolbox is going to be right for you,” she said. “But by deciding what you want to have happen, you have a measuring stick to measure against.”