A FarmLife Special Report: Passing on the Farm
Succession planning transfers land, operations and the legacy of your farm. Are you ready?
By Jodi Helmer
“We often hear the famous phrase, ‘One day this will all be yours,’” notes Heather Watson, executive director of Farm Management Canada, a national organization devoted to assisting farmers with management decisions. “It makes it sound like succession is just a waiting game, not a long and complicated process.”
Indeed, the idea of embarking on such a complicated process can be overwhelming, which is one of the reasons farmers often avoid the topic, according to Watson. Other reasons for postponing succession planning include lack of understanding about the process, insufficient time, fear of conflict among families, an unwillingness to ask for help and concerns over costs.
Perhaps one of the biggest reasons farmers avoid succession planning is the fear that it signals their exit from the farm is imminent—a concern that is often unfounded, according to Dennis Stein, farm management senior educator at Michigan State University. “Succession planning isn’t about setting a specific date to turn over the farm,” he says. “It’s the process of thinking about the steps [to complete the transfer] and helping the next generation develop the skills to run the farm.
“Farming operations have gotten a lot bigger and more sophisticated,” Stein explains. “If a farmer wants to pass his farm to the next generation, he has to think about the process of transferring operations and assets; it’s not going to happen with a promise and a handshake.”
The Case for Creating a Plan
Gary Hachfeld, Extension educator at the University of Minnesota, encourages farmers to think of succession planning as an ongoing process, not a one-time exercise. “You don’t hand over a multimillion-dollar farm business overnight based on a document that was drawn up years ago,” he says.
Just like creating a plan to transfer ownership of the farm takes time, implementing a succession plan is also an ongoing process. The most successful plans, according to Hachfeld, are implemented in stages. In fact, some farmers will start implementing their succession plans up to a decade before retirement. The timing allows farmers (with the help of a team of professionals) to outline and complete a series of steps to transfer the farm to the next generation.
Succession planning also incorporates steps to minimize the tax burden of transferring ownership while protecting business assets. A USDA Economic Research Service report found that farmers are more than twice as likely to owe federal estate taxes than non-farmers (and owners of commercial farms are 10 times more likely to owe estate taxes than small farm owner/operators).
“Without a succession plan and an estate plan, an unexpected death or huge tax bill could cripple the farm,” says Hachfeld.
While the succession planning process varies from one farm to the next, the process might require creating an estate plan and transitioning to a different business structure (from sole proprietorship to a joint venture or S corporation, for example) to facilitate the phased transfer of ownership of land, livestock, equipment, labor, operations and income.
Regardless of the paperwork involved, farmers should be willing to take a hands-on role, ensuring the next generation is prepared to take over the farm. “Turning over the management of the farm, in particular, takes time and mentoring should be built into the [transition] plan,” says Hachfeld.
“Succession planning is about the conversations that happen around creating the plan,” explains Watson of Farm Management Canada. “The plan is the plan. The process of coming up with the plan and implementing it is the important part, because it requires thinking about the future of the farm.”
For a successful transition, Elaine Froese, farm coach and author of “Do the Tough Things Right: How to Prevent Communication Disasters in Family Business,” suggests assembling a team of experts, including a facilitator, accountant, lenders, and estate and business attorneys to participate in the succession planning process.
“Farmers are used to being problem solvers; they want Roundup Ready solutions,” she says. “The problem with succession planning is that it’s an ongoing process with a lot of pieces that are constantly changing.”
A facilitator (also called an adviser or farm coach) can help start the succession planning process, meeting with founders and on-and off-farm heirs to review their goals for succession planning, the anticipated timeline and a shared commitment to implementing the plan. “It might not be a good idea to quarterback this process yourself, because you need to be part of the conversation,” Watson says. “Look for a consultant who appreciates that all farms and farm families are different, and knows all aspects of succession planning and how to put the pieces together.”
Too often, according to Froese, experts make recommendations without feedback from all of the stakeholders. In some cases, farmers create elaborate succession plans without talking to their heirs about their plans.
“I’ve seen $20,000 succession plans sitting on the shelf that will never be implemented, because there was a lot of talk about assets, but no conversations around the goals for succession planning or the future of the farm,” she says.
Once the stakeholders have outlined their goals for succession planning, a team of professionals can help put the plan into action. It’s at this point that it’s important to make time to review and update the plan on a regular basis. Rather than thinking of it as a “one and done” process, Watson encourages farmers to think of a succession plan as a living document that needs the same care and maintenance as livestock, crops and farm machinery.
“Farming is such an uncertain business,” Watson notes. “A succession plan helps remove some of that risk and protects the farm for future generations.”