Farm and Ranch Succession

WHY HAVE A PLAN?

The growth and strength of our nation, with its vast geographic territory, are integrally connected to farming. Although the percentage of the population engaged in farming has shrunk dramatically since the nation’s early days, there are still two million farms in the United States operating over 900 million acres of land, and six million people live in households attached to a farm. Farming remains a vitally important sector for both economic and national security reasons.

“I had rather be on my farm than be emperor of the world.” -George Washington

In light of the considerable challenges faced by family farms, particularly small ones, including high land prices, stiff regulatory requirements, rising equipment costs, and the unpredictability of weather, farmers need to implement business and estate planning strategies that will strengthen their likelihood of success over the long term. Farmers should carefully consider which type of business entity will facilitate not only the present success of their farm but the future as well. Their planning choices should also take into account the eventual transfer of the farm to the next generation. Family farms are more likely than other businesses to be passed down to succeeding generations, so the strategies implemented should consider not only the needs of the present generation but also those of the generations that will follow.

Farm transitions are a transfer of three rights: income, management, and control of equity. Make sure you have the right legal documents to keep your farm stable and responsibilities clearly defined during and after a transfer.

This is a time when you’ll need some professional opinions, particularly for the financial and legal aspects of your farm transition. At Country Lawyer, we provide the legal expertise that you and your family will need to implement a successful transition. We know that the process ahead can be very daunting, so we have provided a general outline of the process below.

FAMILY BALANCE

The Family meeting should include all family members and key people who need to participate in this process. In general, this should include all of your children unless they are not receiving any inheritance from you. It may also include a grandchild or any other person you consider as family or as a potential successor to the business.

Use a location that all can agree on. Create an agenda in advance so that people come prepared to speak to that agenda. Be flexible, and allow for changes.

Establish ground rules- People must feel at ease to talk about any situation they deem necessary. Every conversation must have mutual respect. No personal attacks.

Acknowledge that there will be a difference between the generations in what is important to each. Neither one is absolutely “Right” or “Wrong”. They are just different at certain stages of life. The differences must be acknowledged and addressed. The forms below will help you in discerning those differences.

The most significant part of any succession plan is determining who takes leadership in the next generation. Succession plan leaders should have an assertive, decisive nature. They should also be free of personal defects that would impede their ability to lead the family business to success by making decisions that will be in the best interest of the business.

The parent should develop an understanding of whether any particular candidate has the necessary qualities by testing them with farm or ranch responsibilities. This can be accomplished by giving the candidates duties to determine who can best handle them. The parent should not leave it to the candidates to decide among themselves who is best suited to lead. Doing so often results in fights that destroy the family. Instead, the parent must look at the situation and determine who will lead. The candidates may not like the result, but they are used to taking orders from the parent and are quicker to forgive the parent than each other for a decision they don’t like.

Some questions you may want to ask:

What is your experience facilitating the succession planning process?

Do you understand the specific succession planning needs and concerns of farmers and agribusiness owners?

What other services do you offer and how do you get paid for services?

Treating all children fairly – but not necessarily equally. This might include implementing a plan that allows the child who is managing the farm to have control of day-to-day decisions and be provided with a reasonable salary for services rendered while dividing net profits equally among all the children.

Consider other types of business entities and estate planning tools. A limited liability company (LLC) or a family limited partnership (FLP) can be formed to protect assets, reduce tax liability, and provide for an orderly transfer with minimal conflict between family members. Using these business entities, a management and decision-making structure can be established that will not only facilitate the current success of the farming business but also allow all the affected family members to feel assured that plans for the farm’s future operation will be implemented.

FINANCES

As noted earlier, this information is built on the premise that your family wants to retain ownership of your farm in the next generation, or otherwise wishes to see it continue in agriculture or forest use. In developing plans for the future of your farm, it is important to determine what type of production enterprise – if any – the farm, family, and the community surrounding it will support. Alternatively, if you will not actively manage an enterprise on your land, your decisions will nonetheless depend on the opportunities for its use by someone else.

Because family farms often have significant assets but lack liquidity, long-term care planning for aging farm owners is also important in ensuring farm preservation. Long-term care, regardless of whether it is provided at home or in a nursing facility, is a substantial expense that could be financially disastrous for a farming family, as it could force the sale of the farm or its assets. Planning for long-term care should be done well in advance. Under federal law, most transfers of assets made within five years of the date a Medicaid application is submitted will be disregarded, and those who transfer assets during that period may be penalized. Long-term care insurance, though expensive, is significantly less costly than a lengthy stay in a nursing facility and a better solution than having to sell the family farm.

For many, it can be very difficult to acknowledge our own mortality. Planning for the “unknown” or “worst case scenario” is far too often something we can plan “tomorrow”. Having proper life insurance can be a great relief for any family when an unforeseen tragedy happens. Financial security depends on an honest assessment of what you’re likely to have and what you expect to need.

Some questions you may want to ask:

How much do you need for retirement?

What will it cost?

Do you know if your income will meet your expenses?

LEGAL

Sometimes the current generation of farmers may be reluctant to discuss the future for emotional reasons, such as reluctance to give up control of the farm operations and acknowledge their own mortality. Nevertheless, it is essential to address these issues and plan ahead, even decades in advance of an anticipated transfer. Early planning might aid in avoiding estate tax liability that could force the sale of the farm, unnecessary disputes between family members, or distribution of the farmer’s estate under the intestacy statute, as well as ensuring a smooth transition in the operation and ownership of the farm and a fair distribution of the estate between farming and non-farming heirs. To accomplish these goals, and to establish the present success of the farm, it is important for every farming family to have well-thought-out business and estate plans.

Whether forming a business or reviewing an already established business entity, consider the choice of entity for purposes of tax efficiency, transferability, nature of key interest holders, management efficiency, and protection from liability.

CountryLawyer can help you decide on which business structure may be best for your situation.

The probate process is the legal process for proving the validity of a will and distributing your assets according to that will. The person who is named in the will as executor will be in charge of the probate process with your lawyer. The process can be lengthy and costly and usually lasts several months. With the supervision of the courts, the executor must identify and inventory the property of the deceased, have the property appraised, pay all debts and taxes, and finally distribute the remaining property as the will directs. If you die intestate (without a will), the same process will take place except the court will appoint an administrator of its choosing to carry out the probate process and the remaining property will be distributed according to Iowa law instead of as directed by a will.

It is impossible to know what tomorrow will bring, so it is important to put plans in place to provide for yourself and your loved ones if something should happen to you. Although people often find it difficult to think about being too ill to care for their family or themselves or passing away, this discomfort is minor compared to what your family may have to endure if you do not have an estate plan in place.