Farm Transition Planning: Focus on Long-Term Farm Needs

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You’re involved in the day-to-day operation of your farm – making decisions, meeting deadlines, planning for next year. You’re up to your ears in machinery maintenance, input purchases and marketing – not to mention getting this season’s crop harvested. That’s why it can be challenging to step back from the fires you’re putting out today to think about a bigger picture: your farm’s legacy.

Have you developed a transition plan for when you retire or when it’s time to pass the farm on? You’ve worked so hard to build your operation. Having a succession plan is the best way to ensure your farm’s legacy continues as you wish.

Good farm transition planning involves:

• identifying your values, goals and objectives
• getting the business side of the farm operation in order
• completing personal estate planning
• setting up you assets so that you are financially independent
• thinking through all areas of risk management
• ensuring the proper legal documents are in place

People

When family members enter into the equation, planning can become more complicated.

To date, small business succession planning trends don’t look good.  One study estimates that 70 percent of family businesses will fail to make it to the next generation. With 98 percent of all farms owned by families, the imperative for planning is clear for farm operators who would like to transition their land and operation to the next generation.

While legal structure, estate documents, business documents and financial instruments are all important to a successful farm transition plan, this article focuses on another important part of the planning equation: People.

• Consider this hypothetical farm situation. Here is the background:
• The farm operator is 60 years old
• He is married to a supportive wife, a trusted partner in the farm operation
• They have 4 children – three sons and a daughter
• Oldest son works on the farm. He has always been expected to help out with the workload and carries more of it than the other three children  
• Second son also works on the farm, never finished school and is a bit of a problem child  
• Third son went to college, majored in business administration with a minor in agricultural science. He is a lot like his dad, which causes relationship problems
• Last child is a daughter. She has a close relationship with her mom and is the apple of dad’s eye.  She is married and works in town as an elementary school teacher
• Dad has a preconceived notion the farm should be operated by the oldest son who spends the most time working with
• Dad also feels, like Mom, that all four children should equally own the farm and the two active sons should make decisions on operating the farm.  They believe this is “fair.
• Estate documents reflect equal ownership; no business documents have been drafted or installed

Taking the above scenario into consideration, it’s time to ask some hard questions

• Can the farm survive if you divide into it four equal parts?
• Will a farm that is barely providing a living for two families be able to successfully provide for four?

Fractionalizing the farm

Usually, fractionalizing a farm is not a good idea.  When you cut up a pie and continue to cut it up, the pie eventually gets so small that no one can enjoy it.  The same is true with a farm.  It can be divided so much over generations that it is no longer viable or beneficial to anyone.

Equal distribution of the farm to four children means splitting up ownership, control and the farm’s income.

• Can the farm survive?
• If not, how will that affect the farm’s ability to support those who are caring for it?  Who will be in charge? Who will make critical decisions on its care?

Another common choice farm operators make is consolidating ownership of the land and operations with the active children. But, that may mean that the non-active children receive less, maybe much less than an equal share of the farm operator’s estate. There are alternatives that can help make the distribution more “equitable” and ease the concerns of inequitable treatment among the children.

One way to compensate children who will not receive a share of the farm is a buy-sell agreement funded by life insurance. The farm operator can buy a life insurance policy, the proceeds of which will allow the children who will operate the farm to purchase the remaining shares of the farm from the children who will not operate it. This compensates them financially for being “left out” of the farm operation.

The focus should be maintaining the farm’s economic integrity and getting the right caretakers in place to continue the success of your farm.

But is focusing on the two active sons the right choice in this case? If you can step back from personalities and preconceived notions and make succession decisions based on what’s best for the continued success of the farm, this farm operator may need to examine other alternatives.

For example, the best decision might be allowing the business major to run the business side of the farm and the oldest, most experienced son to manage the field operations. Birth order does not always indicate which child has the capacity and skills to run the increasingly complex financial and business operation that modern farming has become. Our farm operator’s preconceived notion may be faulty.

While planning for the future success of your operation, you and your family may have to face tough decisions that can be contentious.  The best approach is to confront the issues, not avoid them. The decisions are not easy, but doing the right thing seldom is. In the end, the long-term needs of the farm should be the primary priority to increase the odds of success for the transition and the ability of your farm to provide for your family into the future.

Donald G Schreiber, J.D., CLU, ChFC is technical director of advanced sales for Nationwide Financial. He is a registered representative of Nationwide Investment Services Corporation, member FINRA.