Succession Planning Gone Awry – Iowa Family Illustrates How Not To Do Things

June 13, 2009 | Erin Herbold

 

Estate planning, land contracts, transfer of management and wealth, and buy-sell agreements are all components of a good succession plan. In order to successfully transfer the family farm to the next generation, the parties involved should have a specific plan in place. This case demonstrates the need for a viable succession plan and the damage that lack of communication can do to family relationships. 

Here, mother and father were farmers who owned land and operated a hog farm. The hog operation was incorporated, though the hog operation activities were oftentimes conducted through another entity. The father and mother farmed with their children and some of their spouses for a number of years. Two of the sons worked in the farming operation for about two decades. When the farming operation built a hog confinement for the purpose of custom feeding, two of the sons were involved in the design, construction, and operation of the facility. The two sons did not receive regular compensation for the work on the family farm, but did expect to receive some of the farm assets in the future.  

Finally fed up with the arrangement and his lack of compensation, one of the sons stopped farming with the family and sent a letter through his attorney claiming that his parents owed him in excess of $500,000 for his contributions to machinery, equipment and the hog buildings. The second brother continued to farm with the family and work in the confinement facility. He began discussing his future on the farm and a return on his investment with his parents. In 2005, his parents conveyed the confinement facility to him by way of a warranty deed. Apparently, the parents believed that certain strings were attached to the arrangement. When his son started running the confinement and making the decisions, the father filed suit, seeking to restrain his son from interfering with the farming operation’s ordinary business affairs.

At trial, the court stated that there were no clear rules defining which person or entity received the revenues or paid the bills of the hog operation. The only thing that was certain, was that the son owned the hog confinement based on the validly executed warranty deed. 

On appeal, the father argued that the warranty deed should be set aside because it contained conditions that his son did not satisfy. The father also claimed that the transfer itself was fraudulent, because he only transferred the ownership to keep it out of the other son’s hands. The appellate court found that the deed was validly transferred and that the claims outside of the four corners of the real estate contract were not valid. That’s a fundamental rule of contracts. In addition, the court found that since the transfer of the hog confinement was a gift, consideration was not necessary and the gift was irrevocable. K-Pork, Inc. v. Kuhlemeier, No. 9-110/08-0963, 2009 Iowa App. LEXIS 437 (Iowa Ct. App., May 29, 2009).