Valuing On-Farm Heir’s Sweat Equity Is Complicated: Agreements Can Fairly Compensate On-Farm Heirs

Abstract

Determining the value of sweat equity can be both challenging and controversial for farm families. Sweat equity arises as an issue when an on-farm heir receives payment at below market rate, and the farm business grows in size due to an on-farm heir’s below-market labors. Land in the farm may also appreciate in value due to the work of the on-farm heir. It is important to note that the best solution for handling sweat equity is to agree early on to pay the on-farm heir at a market rate. Handling sweat equity early on may necessitate the on-farm heir also working off the farm for additional income if the farm cannot support an additional person fulltime. It is important to discuss the farm succession plan and limit the possibility of sweat equity claims at an early stage of farm expansion.