Whether you’re a first-generation farmer or a fifth-generation one, a farm succession plan should be part of your business model. Farm succession planning differs from basic estate planning, or determining who will inherit your assets once you are gone. Instead, farm succession plans focus on preserving the agricultural legacy of your farm and the heirs who will inherit it; those who will become the new stewards of the land you so carefully cultivated when it was yours.
While an attorney can help you establish a farm succession plan, understanding what goes into one beforehand can be beneficial to those ready to take that step. Perhaps your son or daughter has expressed interest in furthering their education within the sustainable agriculture or other farming-related sectors? Or decided that running the family farm is their career aspiration?
“When you have a child who has reached the age of majority and they have expressed some interest in returning to the farm someday, I think that’s a good time to start figuring out your succession plan,” says Ryan Conklin, an attorney with Wright & Moore Law Co. LPA, an Ohio-based law firm specializing in agricultural legal matters.
Conklin says that it is also essential to determine a farm succession plan prior to any serious health issues that could set in or before you pass away. “There are people who don’t and their families are left to pick up the pieces,” says Conklin.
There’s no one-size-fits-all approach.
Each plan is personal and should include a will or trust for each spouse as well as financial power of attorney and health care power of attorney, according to Roger McEowen, a Professor of Agricultural Law and Taxation at Washburn University School of Law in Topeka, Kansas.
And while cookie-cutter documents and forms definitely exist, customizing your succession plan for your specific family and your farm’s needs usually means identifying common goals and drafting a plan to fit those needs.
“There is no ‘best way’,” says McEowen. “For families who have at least one on-farm heir and other heirs who have no interest in running the farming operation, a common goal is to be fair to all heirs with control of the farming operation ending up in the hands of the heir that wants to farm, and non-farm assets of roughly equivalent value ending up in the hands of the other heirs.”
If you have multiple heirs, one of the first things to consider is how to divide the farm between those who plan to farm and those who do not. To be fair: a farm succession plan with a single heir is far simpler than those who must account for multiple heirs.
“If you have three siblings and you’re splitting up a farm three ways, then that’s fine,” says Conklin. “But what we don’t want to have happen is for the other two siblings to sell the farm out from under the farming heir. There are mechanisms to protect that from happening. We just have to make sure that we have those in place when finalizing the succession plan.”
And equally dividing the farm isn’t always in the farm’s best interest – even if an heir, or heirs, expects that to happen. In order to preserve your agricultural legacy, determining how the farm should be split is part of the succession plan.
“We’ve seen disinheritance occur or folks get a fraction of what their siblings received,” says Conklin. “In the end, with the way the trust or the will is set up, they’re basically locked into that. They can try and challenge it, but they might give up everything they would receive in the process.”
McEowen suggests involving the individuals whom the current owners/operators anticipate taking over the farm in the succession planning to ensure that the next generation understands the needs and desires of those who are, essentially, putting the farm into their hands.
“Normally, inactive persons are not involved in the direct planning although they may be involved in terms of provisions made for them as non-farm heirs,” adds McEowen.
Beyond the land: other assets to include in succession planning.
Obviously, when it comes to farm succession planning, land is the critical component that is passed along, especially considering the cost of prime farm land these days. However, beyond that, there are other assets that should be itemized and accounted for like livestock, feed, equipment and machinery.
Gifting items can be positive because they limit certain tax consequences that come with transferring ownership of an expensive tractor or combine. Conklin says that gifting can make it simpler, but can also result in a gift tax. You can also decide to lease or sell portions of your equipment and have the successor pay in installments or one flat fee.
When it comes to livestock, you can either transfer ownership to the successor or even sell a portion of the breeding herd with the understanding that the successor will pay you in installments. You can also elect to share joint-ownership of breeding stock. Another option is to inventory livestock and, once sold, divide the proceeds between you and your successor.
All of these asset determinations come with tax implications that your succession planning attorney should be able to outline and discuss to make the right choice for you and your farm.
Farming 2.0: continuing the legacy into the future.
Every solid succession plan should incorporate future farming needs to ensure the agricultural legacy you wish to leave behind. These include equipment, livestock and land, which is where McEowen says income tax planning becomes part of the farm succession plan.
“We still see a litany of non-written leases, a lot of handshake agreements that are out there,” says Conklin. “If you want to protect the next generation in their acreage base, get those in writing and get those leases in long-term.”
He adds that the same should be done for any long-term lease agreements with regard to equipment or livestock, too. “The older generation has all the capital and the assets…the younger generation does not. It’s important that we have those sides working together to continue the future of the farm.”Let's Talk about Farmland