Farm Succession Planning: Don't Wait!

The scenario is a common one. The farming parents work in the farm operation their entire life. One or more of their children eventually work with them and wish to continue the farming operation, while their other children do not wish to be involved. Often, parents wish to work in the farm operation for as long as they can.
Father and son farmers
Greg HammesWith this common situation come questions:
1. How and when is the farm operation or the control of the farming operation transferred to the farming children? and
2. How do the parents treat the non-farming children fairly?

The farming operation often is most efficiently transferred to the farming children when the parents complete a timely and effective succession plan. Experts indicate that often the crisis facing the family farm focuses on the issue of succession.

Succession planning is the transferring of the farming operation from one generation to the next. Every family and farming operation is unique.
Because of this, there is not one set succession plan that will work for every situation. Some plans result in transferring the farming operation during the lifetime of the parents, while others are best when transferred at the death of the parents. Often the plans require the use of other unique assets, such as life insurance, to provide for the non-farming children. Every plan and family is different and needs to be addressed individually.

So, when should formal succession planning start? It is like the old Chinese proverb. When is the best time to plant a tree? 20 years ago. When is the second best time to plant a tree? NOW! It is never too early to start the planning process. A succession plan is no good if it only exists in the minds of the parents.

Farming children want to know now what their future will be in the farm operation. If the farming children are uncertain of the plan or believe that the transfer of the farming operation or control of the farming operation is too far in the future, they may get frustrated and decide to do something else. Often, this can leave the parents at a point where they are ready to step back, but there is nobody to step forward. Succession planning can provide comfort to the farming children who know that a plan will be in place to allow them the opportunity to control and own the farming operation in the future.

An effective succession plan will often require the use of a team to provide the best outcome. The team will often consist of a CPA, attorney, financial advisor, insurance agent and maybe all children. Including the children as part of the process will often give comfort to the farming children, ensuring that they have a future in the farm operation, and informing the non-farming children of the effect of the transfer of the farming operation.

Some of the succession issues that will be addressed by the team are:
  • What is the most efficient way to transfer the farming operation from an income tax, gift tax and estate tax standpoint?
  • Do any legal entities need to be formed to accomplish the transfer of the farming operation?
  • If transfers are made during their lifetime, will the parents have sufficient income to do what they want for the remainder of their life?
  • How will the non-farming children be treated fairly? It is important to remember that fairly is not always equal.
  • If more than one child wishes to farm, what is the best structure to allow for all children to farm and still remain friends?
The sooner these succession issues are addressed in a formal plan, the greater the chance of success.

Some of the common reasons why the succession of the farming operation is delayed are based out of the fears of the parents. The fears are often the following:
  • Somebody may run the farming operation better than me.
  • Nobody can run the farming operation better than me.
  • The farming operation is my major source of income and I need to stay active to protect the income.
  • I do not want to choose one child over the other to be the successor to the farming operation.
  • The children will change the way the farming operation is run if I am not there.
  • I need someplace to go.
  • Without the farming operation, I am nothing.
  • Without me, the farming operation is nothing.
  • Too many people have died soon after they have retired and transferred control of the farming operation.
All of these are real, legitimate fears that often cross the minds of the parents. However, effective succession planning often is not achieved because of the failure to plan from a psychological and emotional standpoint. These issues can be addressed by a well thought-out succession plan and a team of professionals who work together to achieve the family goals and make the succession plan a reality.

Often the cost of doing nothing can be devastating.
Depending on the size of the estate and the method of transferring the farming operation, the potential taxes can greatly diminish the value of a lifetime of hard work. In addition, the family scars from children not understanding the wishes of the parents and reasons for transferring the farming operation can leave the relationships of the children forever damaged.

The goal of any succession planning is to make sure the plan ends with SUCCESS. If you wish to discuss succession planning, please contact a professional at Bell Bank Wealth Management to assist in properly implementing a plan.

Greg Hammes, Senior Vice President, has more than 25 years of legal and accounting experience. He received his undergraduate degree in accounting from the University of North Dakota and his doctoral degree from the University of North Dakota School of Law. Greg is also a Certified Public Accountant. Greg lives in Fargo with his wife and three daughters.