I just spent the day with a couple dozen farmers in a workshop called Transferring the Farm. The participants ranged in age from late twenties to late eighties, they came from four different states, and they produced everything from milk to entertainment on their farms. One thing they had in common was the challenge of figuring out how to pass a farm from one generation to another.
This group was typical of the situation across U.S. agriculture: most of the farms did not have a successor named for the farm business, and most didn’t have an estate plan. Wow. We’ve all heard about threats to the long-term viability of farming like urban sprawl, labor shortages, low prices and complex regulations, but this is agriculture’s self-inflicted wound: the failure of so many farm families to plan for the future of their land and their farm businesses.
It’s not easy. One attorney at the workshop said that farms are probably the most difficult estate planning and transfer problem that he deals with. There are strong emotional attachments to the farm, among the people that live, work, or grew up there. Often there are a lot of assets but not much cash. It’s usually difficult to divide the assets without breaking up the farm, yet it can be difficult to finance a buy out of non-farming heirs. A farm transfer plan can help deal with some of these issues, especially if it’s developed well in advance of when it will be needed. Be aware that there is no ‘one size fits all’ plan. Each farm and family situation is unique, and needs a customized plan.
Plans you don’t want. There are two types of plans that are all too common, but not very desirable: the ‘no plan at all’ plan and the ‘gonna do something someday’ plan. These plans are good for providing the government with extra tax revenue, and they allow the State to decide how a farm property gets distributed. Such plans usually keep several attorneys busy and they can cause plenty of trouble among family members. Sadly, these ‘non-plans’ often lead to sale of the farm for development.
The clear alternative is succession planning, both for the farm business
and for the land.
I can’t begin to cover all the issues and tools that can be involved, and I’m not qualified to do so, but there are accountants, lawyers and Extension personnel that can help you understand your options. There’s a lot of information to deal with, and many, if not most, farm situations are complicated, but don’t let that stop you. One farmer in the workshop offered this encouragement: “Take it one step at a time” she said, “little by little you’ll find that the pieces fall into place.”
Communication is key. That’s what the farmers who had completed their plans kept emphasizing. While the older generation usually holds the cards in terms of ownership of assets and decision-making power, all parties should be involved in the discussion. Everyone’s needs and desires should be honestly but tactfully expressed. That may not be an easy thing to accomplish, especially when crusty Yankee farmers are involved. But however difficult it may be, it’s important to start talking about the future.
What are the goals? I think it was Yogi Bera who said “If you don’t know where you’re going, you’ll probably get there.” To get where you want to go, each generation has to identify their goals. For the older generation these may include: providing security in elderly years, minimizing estate taxes, helping the next generation get into or stay in farming, and conserving the land for future generations. The younger generation may have the same goals, or not. Some heirs may want to develop land for cash. Others may want to farm the land, or have it farmed--but not by them. There are Extension worksheets available to help identify where goals are the same and where they differ between generations, and that’s important to know, so solutions can be sought. If goals aren't thought out, solutions agreed upon and put firmly in place, then the transfer process probably won’t succeed.
Be realistic. It’s critical to determine how much income the farm business really generates, what is needed by the family or families that plan to live on the farm, as well as what income will be needed by the retiring generation. Then, a transfer process can be designed that attempts to meet these needs without putting the farm business at risk. Both an estate plan and a farm transfer plan will be needed.
Estate planning applies to everyone, not just farmers. Estate planning determines who gets what, when, and who is in charge (the executor or trustee). You need to have a will, and if you have an old one it should be updated. You need to designate someone you trust as your agent (called a durable power of attorney) who can conduct your farm and personal business for you in the event you are not able to. And you may want to work with a professional to decide whether it makes sense to set up a revocable living trust for tax purpose, such as avoiding estate taxes, or for non-tax purposes, such as providing for minor children or managing business assets after your death or providing for a surviving spouse. Trusts are powerful estate planning tools but they’re not for everyone.
Farm transfer tools may include some estate planning tools like wills and trusts, as well as other strategies such as gifts, outright sale, leases, and establishing legal entities to own some or all of the farm business assets and/or some or all of the farm land. Limited liability companies (LLC) and even the old fashioned farm partnership are flexible and adaptable and make it much easier to gradually transfer an interest in a farm business or farmland. The consequences of each strategy or combination of strategies must be carefully considered. The final decision will depend on many things, including the finances of all parties, tax issues associated with each strategy, and treatment of non-farm heirs. This last issue can be a tough one. A will or a trust that leaves property to heirs in “equal shares” may not be appropriate where you want the farming heirs to receive farm property and the other heirs to receive non-farm property.
In summary, a well thought out farm transfer plan in conjunction with an estate plan can help make sure that farm business and farm family goals are achieved. Such planning is a detailed process, and requires the help of professionals. People that can help get you started are an attorney (one with experience doing farm transfers), an accountant, a financial planner, the family banker, or an extension farm management specialist. The most important thing is to get started.
Links to more information on estate planning and farm transfer have
been compiled by University of Connecticut at: www.canr.uconn.edu/ces/frm/estate_planning.html