Let's say two of your children are actively engaged in the day to day business of your farm, plowing fields, taking care of animals, and working in the back room doing the paperwork, keeping your business in the black and safe from legal issues. They've invested their careers (or at least a substantial amount of time) in the farm. But you also have two other children who have gone into other lines of work and who may have little interest (and few skills) in your business.
How should you create an equitable distribution plan?
If you split up ownership equally among the four children, you could spark resentment. The two active children might be upset. The two children who don’t understand your business might not know what to do with their power and come into conflict with their siblings over day to day management and bigger picture issues. At the same time, you don’t want to cut your two passive children out entirely, especially if your main assets are tied up in the farm.
Here's one solution: Create two class of ownership.
1. Active Children
The first class consists of those heirs who know the farm and the business on an intimate level. They can collect a salary as well as distribution from the profits.
2. Passive Children
The other children would not collect a salary from the farm or deal with managerial issues; however, but they can still collect a distribution from the profits. If your two “farm hand” children decide to sell the business, all four children could share profits in an equitable fashion.
Here's a second tactic: form an LLC to draw up a document called a Buy Sell Agreement.
This document will allow your active children to purchase the estate from the passive children, who can then collect proceeds from the sale. For instance, maybe the two passive children moved away to the East Coast to work in the banking industry, and they don’t really want to run the farm or even worry about profits (or lack thereof) coming from the farm. A Buy Sell Agreement will allow your two active children to buy out the two kids from the East Coast in a simple, fair and pre-thought out way, to minimize family tensions.
In out next post, we'll talk about how to structure an LLC, so that you can take advantage of this Buy Sell Agreement tactic. However, if you have pressing concerns about your distribution plan, or if you’d like to discuss another issue related to Ohio estate farm planning, please call the Gudorf Law Group, LLC right now at 1-877-483-6730 to set up a free time to talk with us.