The time comes when every farmer must consider handing over the keys to the tractor, but taking certain steps now can lead to better decision-making and far less conflict when it comes to succession planning.
According to the U.S. Department of Agriculture (USDA), during the next five years, about 10 percent of all farmland will transition to new owners. And while nearly 80 percent of all farmers wish to keep their farm in the family, the truth is that not even a quarter have a sufficient plan in place.
“Succession planning is a part of the development of a complete business plan for a farm operation,” according to a USDA report. “In one sense, succession plans are a road map for use in deciding how to handle management of the business as the household enters the retirement or transfer stage of the family life cycle.”
So what to do? If you were preparing for an emergency, any instructor would tell you to be prepared before the need is there. According to the Red Cross, families should take three steps: make a plan, collect essentials and be informed. The same steps can be instrumental in family farm succession planning.
1. Make a plan: Early meetings with family members are so important that many advisors recommend a 10-year succession plan when possible. If not, a five-year plan should be the minimum. Why? Families who farm find that the majority of their wealth is tied up in the assets and equipment used for farming, not to mention the value of the land itself. Needs for retirement must be extracted from the same source of income the next generation needs to keep the farm operational.
And don’t forget the emotional aspect of giving up the farm. It’s hard to witness, even discuss, a handover because it finally acknowledges that mom and dad are getting older and can’t do it all anymore. The more conversations occur and the earlier, the easier it is to overcome the emotional aspect and consider realistically what it will take to keep the farm successful.
2. Collect essentials: Before succession can occur, families need to make sure they have the right documentation in place. Ownership papers, deeds and more must be available to family members involved in the transition. Tax questions and financial arrangements with banks, lien holders and loan agents should also be in order. The earlier these steps are done and the more frequently they are reviewed, the less issues will occur when succession actually takes place. Routine maintenance is better than an overhaul, so even making sure that necessary farm equipment is in good operating order also won’t hurt. No one wants to leave a new owner in the lurch, especially when it’s one of the family.
3. Be informed: Life changes and so do needs. As succession planning gets closer to a handover date, there shouldn’t be any surprises. Continuing to meet and update plans keeps all involved as informed as possible. Perhaps there’s a better way to shelter some of the assets or maybe that five-year plan needs to speed up a bit to take advantage of new tax cuts. Regardless, keeping all family members informed and up to date is a good way to stay prepared and on course.
Since 2008, the folks at AgriLegacy have been working with local farmers and their families to educate and prepare them for a successful transition. Contact them today for more information on ways to improve succession planning.
