There are questions every grower needs to consider at some point, whether they’ve been in agriculture their whole lives, are taking over responsibilities for aging parents or are developing complementary enterprises to enhance a family business. Who owns the farm? And what will happen should an owner die, retire or simply decide to end the business? Planning for the operation to continue is a complicated, emotionally charged and often overlooked process.
Everyone’s familiar with some version of the story. The grower becomes ill, and money is needed to pay for medical expenses, funeral expenses, estate taxes and more. Maybe there was no will, and the laws of the state say that all heirs will inherit the property equally, but only one wants to farm it, and the rest demand a buyout. Equity is tied up in the land and equipment, and without any other financial resources to settle debts, the farm must be sold.
However, measures can be taken to ensure that the farm continues operation as one generation retires and the next takes over. Succession planning involves preparing for the retirement needs of one generation while transferring the farm assets, business responsibilities and management decisions to the next. It can be a daunting task.
1. Team approach
Farm succession planning requires a team: financial advisors, lawyers and estate planning professionals who can offer guidance and strategically plan to meet the grower’s goals. Input from the family – in-laws, nonfarming heirs and anyone else whose life will be impacted – is another critical component of successful succession planning.
Implementing the actual succession plan may take several years, during which time assets and responsibilities are reallocated. By spreading the process out over a few years, tax burdens can be reduced, ownership can be seamlessly transferred, and farm business management strategies can be put into place.
A great place to begin the succession planning journey is the University of Minnesota’s AgTransitions website (http://www.agtransitions.umn.edu), which provides free, interactive, step-by-step planning.
“This is a process, not an event,” said Dave Goeller, assistant director of the North Central Risk Management Education Center at the University of Nebraska-Lincoln, speaking in a video interview accessible to AgTransitions users. “This is something that is going to take some thought, some consideration, lots of communication, lots of discussion.”
2. Estate planning
Estate planning, which considers the needs of farming and nonfarming heirs, is an essential component of succession planning. It includes providing for retirement and end-of-life needs, and also protects the estate from being distributed according to intestate law when the deceased has no will.
This portion of succession planning ensures that assets pass to the desired parties. It involves minimizing costs (such as taxes and probate), avoiding delays, caring for minors, and planning for long-term expenses. Wills and trusts protect assets and provide for distribution.
There are some financial tools to protect assets from inheritance or estate taxes; choosing the right ones for your farm requires professional input. To provide for nonfarming heirs, arrange for them to inherit nonfarming assets, such as life insurance beneficiary payments, while allowing the farming heir to own the farm assets. Common ways of transferring ownership and assets include sales agreements, gifting and inheritance. Each has benefits and pitfalls.
A buy-sell agreement is useful when there are nonfarming heirs. It is a contract for the future sale of a business interest between partners. The farming heir and the parent enter into a partnership, and the buy-sell agreement is a “business version of a prenuptial agreement,” according to Ron Beach of Peoples Co. Beach presented a workshop on buy-sell agreements for the Women Managing the Farm Conference held in Kansas last February.
“A buy-sell agreement sets out the terms by which the farming partners can buy out the nonfarming heirs. Well-thought-out and structured buy-sell agreements would save many multigenerational farms from the auction block,” he said. Considerations include determining how the business will continue if a partner dies or the partnership is dissolved, as well as restricting to whom a partner can sell. Buy-sell agreements are useful “if there are family members in a family farming partnership and there are nonpartner heirs.”
3. Farm succession
Succession planning includes an estate plan, but it’s also a tool for current business management. It’s essential to develop the long-range business plan now so the operation can continue into the future.
“Assets and ownership can be transferred a number of different ways,” said Mike Sciabarrasi, agricultural business management specialist, University of New Hampshire Cooperative Extension, in an AgTransitions video. “Certainly, you are going to handle inventory differently than you are going to handle machinery or real estate.”
Assets include current assets, such as feed or crops in the field; intermediate assets, like machinery and equipment; and long-term assets, which are the land and buildings. For example, a child entering into the farm business with a parent may take ownership of some current or intermediate assets, but not the land. Figuring out how to structure the business to benefit both generations is key.
There are various ways to configure a multigenerational farm business. One is to keep the farm as a sole proprietorship, with the next generation working for the parent. A child could run a complementary, but separate, farm enterprise and share resources. Other options include forming an alternative entity, such as a corporation or partnership.
No matter which business structure best suits your needs, the day-to-day management must also be considered. How are the generations going to work together? How are financial and management responsibilities divided? Who determines hours and establishes job responsibilities? Who is the ultimate decision-maker? Having a formal, written business management plan can clearly delineate expectations and be a tool for the older generation to pass on skills and knowledge, while gradually letting go of responsibilities.
Now is the time to think about succession planning. Things might change, but if the long-range plan is to make a living farming, to have the farm continue when you can no longer farm, or to keep the land in the family, it may be now or never.
The author is a freelance contributor based in New Jersey. Comment or question? Visit http://www.farmingforumsite.com and join in the discussions.