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Farm succession planning can be a complicated process for many farm families. A recent decision out of Minnesota involving a farm dairy’s succession plan highlights what can go wrong when farm families do not handle the situation. The parents had three children, and one child had moved back to take over the farm. The parents placed the farmland into a revocable trust with each child as a beneficiary to the trust. This trust eventually causes problems for the one child who moved back to the farm to continue its operation. The trust allowed the three children to co-own the property and granted one owner the ability to petition the court to partition (divide up) the property. This case highlights why farm families should develop plans to enable the child(ren) who want to continue the farm the ability to sustain the farm but at the same time be equitable to the non-farm heirs.
Background
The Neumanns operated a dairy farm consisting of two parcels of land. In 1995, the Neumanns conveyed their two parcels of farmland into a revocable trust, with the couple’s three children as beneficiaries of this trust. In 2004, a daughter (Pronschinske) and her family purchased the Neumanns’ dairy herd and leased both parcels of farmland. Pronchinske and her family moved a mobile home on the farm and converted the dairy into an organic operation.
Mr. Neumann passed away in 2008. In 2009, Pronchinske and Mrs. Neumann entered into a written lease for the farmland, with both parties agreeing that the value of capital improvements Pronchinske had made would apply to the purchase price of the farm in the future, or alternatively, Pronchinske would be compensated for the cost of capital improvements.
Mrs. Neumann died in 2012, and the three children became co-tenants in the farmland with equal undivided interests. In 2015, one of the Neumann children commenced a partition action against his siblings, Pronchinske and Anderson. A partition action is when the court divides a common property among its co-owners or requires the property to be sold and the money divided among the co-owners.
Minnesota law requires that referees be appointed in such cases to determine how the property should be divided. Referees are disinterested parties who interview the parties involved in a partition suit, view the property, inspect as needed, and recommend to the court how to handle the partition suit. The three children, in this case, agreed on the appointment of two referees.
In late 2016, the referees issued a report to the district court. In the report, the parties all agreed to 1) use a 2012 appraisal and 2) that the property could not divide without great prejudice to Pronchinske who wished to continue operating the farm after making substantial improvements. The referees recommended that the court award Pronchinske both parcels of farmland with a credit of $119,000 in capital improvements and pay $387,667 to her two siblings. The district court sent the report back to the referees to clarify what “great prejudice” towards Pronchinske in the report meant.
In 2017, the district court granted a motion to set aside the report, finding that the report was only advisory and not binding on the district court. The district court also found that there was no evidence of great prejudice to all the owners, just Pronchinske. The district court concluded to divide the farmland into equal thirds to the three children. Pronchinske appealed that ruling.
Court of Appeals Opinion
On appeal, the Court of Appeals of Minnesota reviewed the district court’s power in confirming or setting aside a report from court-appointed referees. The state’s supreme court had found in earlier cases that a referee report was entitled to the same force and effect as either a jury verdict or a finding made by the court. In other words, the district court was to give considerable deference to the report.
The Court of Appeals had to determine how much deference the referees’ report was owed. In previous decisions, the state supreme court had cited a Freeman treatise on Cotenancy and Partition from 1886. Freeman’s book laid out the history of partition suits and the use of referees. Freeman explained that deference should be given to the written report unless the referees made a procedural error that adversely affected the rights of one of the parties. If the court does set aside a report, then the court needs to refer back to the referees or appoint new referees. The Court of Appeals determined that the district court should have deferred to the referees’ report.
The court next turned to the question of whether the district court erred when setting aside the referees’ report. In reviewing the report, the district court erred in not deferring to the referees’ report. Reviewing the referees’ report, the court determined that one sibling viewed allowing Pronchinske to buy the property was a forced private sale and preferred the property be put up for public auction. The other siblings were not in favor of a public auction.
The other sibling thought each sibling should get one-third of the farm’s fair market value or alternatively, sold at a public auction and the proceeds divided into thirds. This sibling was also more than happy to sell back her share of the farm to Pronchinske and allow Pronchinske to continue to operate the family farm. All this demonstrated to the court that the district court had erred in not properly deferring to the referees’ report.
The Minnesota Court of Appeals reversed the district court’s decision, although this ruling may not be the final word on this decision. Pronchinske’s siblings still have the right to appeal this decision.
The parents in this case made a decision many farm families make; they decided to treat each kid fairly by giving each an equal share of the parent's estate. Dividing assets equally, however, is not always fair to the one child who may still be running the farm. Talking to your family and developing a plan that is fair but still allows the one sibling to continue on the farm is your better choice. As this case highlights, a revocable trust giving equal rights to all the siblings is probably not the right method to reach a result that allowed Pronchinske to continue to operate the farm.
Imagine how you would feel if you are Pronchinske. You have built up a farm, built a home on the farmland, and are now potentially going to see two-thirds of your farmland sold with no guarantee you will be the highest bidder. Developing a farm succession plan allowing Pronchinske to continue operating the farm while treating the other two siblings fairly would have been a better way to work this out.
Developing a plan to allow the farm to continue can take time and can require more input than you potentially want to bother with, but can prevent the problems we saw in this case. In this case, two siblings potentially have the power to force a sale of the farmland. Allowing this kind of power can lead to a breakdown of family relationships. Put yourself in Pronchinske’s shoes: would you want to hang out with the one sibling trying to force a sale? Developing your farm success plan can prevent problems and potentially save family relationships after you are gone.
To learn more about the farm succession planning process, check out the University of Maryland Extension’s Farm Transitions and Estate Planning page at https://extension.umd.edu/agtransitions.
References
Neumann v. Anderson, A17-1450, 2018 WL 1997090 (Minn. Ct. App. April 30, 2018).