Putting a Value on Sweat Equity

For some farm/ranch families, deciding what to do with the family business can be very troublesome. How can we pass the farming business to the next generation while at the same time not create animosity or envy between the heirs? If we divide it equally between all the children, will it create such small pieces that the successor child cannot make a living operating the family farm? If one child is required to buy out his/her siblings will the business generate enough income to make this a feasible option? Most parents would say “We want to treat our children fairly.” Is dividing the farm equally between all the children always a fair solution? Last week I found myself thinking about a family farming operation struggling with the dilemma of planning their estate. Let’s call this family the Smiths. Like many families, Dad and Mom Smith would like to keep the “farm in the family.” Fortunately for them son Jimmy, the youngest of three children, decided to return to the business in 1990. But unfortunately, if the farm business were divided into three equal pieces, the resulting slice would not be of adequate size to create a viable operation. When Jimmy came back into the family business in 1990, the fair market value net worth of the business was $600,000. Dad and Mom discussed the contribution that each child had made over their “growing up” years and decided that each child had contributed more or less about equally to the business during those years. $600,000 divided equally between the three children is $200,000 each. Today’s net worth of the business has grown to $1,500,000. If divided equally between the three children $500,000 would be left to each. The contributions from the three children toward the success of the farm business have very definitely not been equal since Jimmy’s return, however