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Farm Succession Planning

Wednesday, August, 19, 2015



by Roger T. Williams


Farm succession—transitioning the farm from one generation to the next—can be overwhelming for farm families when added to the daily decisions necessary to run the farm.  If a farmer is lucky, succession will be something experienced just twice in a lifetime: once when first taking over the business and again when passing it down to the next generation.


Farm succession requires early planning and good communication.  Early planning provides time for building management skills and equity for the younger generation; it also provides time for the older generation to service debt and plan for retirement.  Good communication involves a blend of good family communication and good business communication so the decisions made work for both generations.


Farm succession also raises the question of readiness: the older generation’s readiness to step back from the day-to-day responsibilities of farming and the readiness of younger farmers to take on these responsibilities.  Getting these two “planets” to align at the same point in time can be a delicate or perplexing thing. 


Consider three scenarios.  A farm couple in their late 60s are experiencing health problems and desperately want to transition their farming operation, but their children aren’t sure they want to take over the farming reins.  A young farm couple in their 20s want to assume responsibility for the management and labor of their family farm, but the parents just aren’t ready to let go of the work or management responsibilities.  And, a farmer in his late 50s—who was told “The farm will be yours” for decades and decades—starts pushing on his dad and his dad becomes so furious he sells the farm to another party.


All three of these scenarios could be prevented with early planning and good communication.  Farm parents need to take the lead in this planning/communication process. There are barriers to thinking and talking about this transitioning process, but these barriers can be overcome with careful planning. It’s important that the issues below be thought through carefully before initiating communication with the younger farmers in this transitionary relationship. This paper focuses on planning for the transition (a companion paper—“Farm Succession Communication”—focuses on the communication process with younger farmers).


Issues to Consider

1) Financial Viability:  One of the biggest barriers to farm succession is not knowing whether there is enough “gold for the golden years”…whether there is sufficient income to support all families involved in the farm transfer. OneWisconsin farmer said “This is paramount” when he described the need to have adequate money for both families as they were transitioning their family farm to his daughter and son-in-law.  Two strategies can be helpful here.  One strategy is to seek outside help in assessing your financial situation: debts/assets, cash flow and the income needs for both generations during and after the transition.  You simply can’t make plans without solid numbers in each of these three areas.  An independent, outside person—Extension agent, technical college farm training specialist, DATCP farm credit adviser or trusted farm management consultant—can help you achieve some objectivity in arriving at these numbers.


A second strategy, best implemented early in your farming career, is to set aside money in IRA, 401K or SEP accounts so you don’t have to liquidate farm land, cattle or machinery to achieve the financial independence you are seeking.  If you view the farm as your Social Security, your pension, your IRA and your 401K, you may need to liquidate some of your assets and this could jeopardize the farming operation for the next generation.


2) Financial Arrangement: There are a number of financial arrangements for transferring farm assets.  Since they all have advantages and disadvantages, this creates another barrier to succession planning.  An outright sale of land and other assets is the simplest transfer method, but most younger farmers don’t have the capital to purchase these assets unless the older farmers are willing to finance the transfer through a land contract arrangement or offer an outright gift of farm assets.  Two other forms of transfer are common:  1) rent of land and sale of cattle/machinery, and 2) gradual transition of farm assets through shares of stock or interests in the farming operation.  The sale of cattle and/or machinery may require outside financing or financing by the older farmers.  The transition of assets through the sale of stock or interests in the farming operation requires setting up a corporation or limited liability company (LLC).  Two strategies can be helpful in dealing with this barrier.  First, seek the advice of tax, accounting and legal specialists and, most important, talk to other farmers who have transitioned their assets in various ways.  Second, talk to the younger farmers involved in this farm transfer and try to find a win-win solution for both parties.  Be clear about whether you can gift assets to the younger generation or whether you would be willing to finance the farm transfer through the use of a land contract arrangement before entering into this conversation…it could help facilitate the discussion.


3) Legal Arrangement: The financial arrangement and legal arrangement are often intertwined and, because most of us are not legal experts, this can create another barrier to farm succession.  The three most common legal arrangements are sole proprietorship, partnership and limited liability company (LLC).  Sole proprietor is perhaps the simplest and most flexible legal arrangement since it can be established, bought, sold, modified or terminated quickly and easily.  Partnerships often evolve through the operation of the farm business over time; to be effective, partnerships should have a written agreement that specifies how decisions are made, how income and expenses will be divided and how issues will be resolved over time.  Limited liability companies (LLC) have become popular with new farm businesses since they offer the simplicity of a partnership for income tax purposes and the limited liability afforded to corporations.  A well-written operating agreement is the foundation for a strong partnership or LLC arrangement.  The same two strategies can be helpful in dealing with this barrier.  First, seek the advice of tax, accounting and legal specialists and talk to other farmers who have used these legal arrangements.  And second, talk to the younger farmers involved in the transfer to find a win-win solution for both parties.


4) Management/Labor Decisions: Farmers wanting to transition the farm will probably go through various phases as they transition labor and management to the younger farmers.  In the early phases, they may provide most of the management decisions while the younger farmers provide mainly labor.  Then, as the younger farmers become more experienced with the farming operation and more responsible, the management decisions can be shifted in their direction.  The most important strategy in dealing with this barrier is to keep talking with the younger farmers involved in the transition.  Create agreements about who will be making the important management decisions, who will have input into these decisions and what the decision-making

process will be at each point in the farm transfer.  And create agreements about who will be doing the work at each point in the transfer.  It might be helpful to outline the specific tasks of each party at various stages in the farm transfer so there are no misunderstandings about who is responsible for the major farm tasks.  Many farmers want to maintain some involvement in farm management and/or day-to-day chores on the farm.  Regular farm family meetings can help you make this transition with a minimum of tensions or conflicts.


5) Personal/Business Relationship:  You will probably want to sort out what type of relationship you would like to have with the younger farmers involved in your transition.  Will it be a close, personal relationship where you are interacting with the younger farmers and sharing personal information on a regular basis?  Or, will it be a distant, business relationship where money is exchanged, agreements are modified on an occasional basis and there is little personal sharing?  If the younger farmers are family members, your relationship is more likely to be close and personal, thus allowing for greater flexibility in day-to-day functioning.  But regardless of whether the relationship is with family members or non-family members, there is something to be said for the clear expectations that come with a business relationship.  The key strategy here is to envision or imagine the relationship you would like to have with the younger farmers in the immediate and more distant future.  Then, work toward achieving this relationship over time.

6) Identity as a Farmer: Most farmers have been involved in farming so long—doing simple farm chores as a young kid then farming seven days a week for decades—they have a difficult time imagining a life outside this field of work.  But this is precisely where you might want to start.  The first strategy is to imagine or visualize yourself doing something other than farming: traveling with your spouse, getting more involved with recreational activities (fishing, golfing), running for public office, doing volunteer work or pursuing an alternative career (running a gardening center, working with a farm-related organization, providing consultation in areas where you have expertise).  Some farmers have a basic desire to help others or be more social.  This is the time to let that social or helping “animal” out of his/her cage, to envision a life where you are helping others, serving in public office or interacting more with others.  The second strategy, of course, is to begin doing some of these alternative pursuits in small ways to see how it fits with your personality and current needs in life.  Many people dream of a leisurely life on the golf course or fishing along the bank of a trout stream, but then find that the routine wears thin over time.  Your goal should be finding the right mix of activities that results in a satisfying and meaningful life.


7) Relationship with Your Spouse:  Any transition of the farming operation will probably involve a change in the relationship with your spouse (if you are married!).  When you are fully engaged in farming, you may have hectic schedules and may be going in different directions…to the point where you have little contact or little genuine communication with your spouse.  This may be a wonderful opportunity to improve your relationship with your spouse.  You can start by sitting down over a cup of coffee or tea and discussing your hopes and goals for a life that involves less farming.  You may want to create a weekly “date night”  together or a regular outing with an activity you both enjoy.  Since farming often puts a crimp in vacations and/or travel, this may be a time for more extensive travel together—domestic or international.  If communication is strained, there are various forms of “marriage encounter” or “marriage enrichment” that can be helpful in reconnecting with each other.  Counseling or therapy can be another tool for deepening and enriching your marital relationship.  Check with your doctor, your church or your local human service agency for resources related to marriage enrichment or counseling.


Communication: Taking the Next Step

Once you have thought through the issues and have a good idea of where you would like to go with the farm transition, it’s time to have a conversation with the younger farmers who might be taking over your farming operation.  Don’t make assumptions about this; it needs to be talked through in a sensitive and caring way.  For ideas about how to communicate with younger farmers, see a companion paper “Farm Succession Communication.”