Death and Taxes is How We Lose It: The Importance of Succession Planning for American Agriculture

The hit TV show “Yellowstone” has achieved popularity with agricultural and non-agricultural audiences alike. Along with dramatized glimpses of ranching life, it also provides nuggets of truth with real world application. In a recent episode, while facilitating the sale of a family farm where one sibling couldn’t afford to buy the other out to retain the ranch, a real estate agent simply stated

“Horses and cattle may be how the West was won, but death and taxes is how we’re gonna lose it.”

Though that is certainly an oversimplification, the fact remains that failing to plan for the transition of a farm or ranch to future generations, and the tax consequences of those transfers, can result in the forced sale of some or all of the operation, many times to someone outside the agriculture field. Making a plan for the future can be intimidating, as it involves confronting mortality and making business decisions intertwined with family dynamics. Fortunately, there are steps that producers can take and resources available to make the process less overwhelming.

Step 1 – Know What Makes Up a Succession Plan

A common misconception is that succession planning is just a different term for estate planning. In reality, estate planning is just a portion of the process that works alongside a comprehensive plan to move the operation from one generation to the next, including the transition of decision-making power and the management and work responsibilities of the operation. In order to facilitate a successful shift, a succession plan typically includes steps that develop the next generation’s knowledge and participation in the operation, making it important to begin planning as soon as there is an indication that the next generation is interested in taking over when the current generation is ready. A thorough plan will consider the strengths and weaknesses of each of the parties to the transition, goals for the operation’s future, and potential threats or obstacles to the operation’s success. The key ingredient for a succession plan is detail, as it reduces the risk of misunderstanding, so the more that can be put in writing, the better.

Step 2 – Know the Specifics of Your Operation

Familiarity with one’s operation includes both quantitative and qualitative aspects. It is important for everyone involved to know the status of the operation’s finances and resources. This allows the feasibility of future operations to be assessed and also provides clarity for the successor about the situation into which they will be stepping. An accurate inventory of all resources, including tangible assets, support services, and people willing to assist is important information to flesh out the assessment. State extension programs can provide assistance in analyzing these values to gain an even better long-range picture and develop a financial plan.

The qualitative specifics are more individually based and require some introspection and honesty from the parties. Each person involved in the transition should work to clearly identify their own wants and needs for the operation before sharing that information with other family members. In doing so, they will likely avoid some of the difficulty that may come from trying to voice opinions about the future of the operation and wanting to avoid “stepping on toes.” Individuals should also be aware of the strengths and weaknesses they bring to the transition and whether those characteristics lend themselves to continuing the same operation procedures or whether a change is in order. Once those individual visions and assessments are complete, all stakeholders should work together to create a central vision statement around which the succession plan will be formed.

Step 3 – Formulate a Plan

Once the broader vision statement is established, focus can shift to creating more specific objectives and goals that achieve that vision, while factoring in the inventory of resources available. Feasibility, attainability, and timeliness are necessary considerations when forming these goals and objectives and must remain a priority throughout the planning process. A business plan incorporates all of the stakeholder-established goals and objectives into one comprehensive plan that shows forethought and reliability to both internal clients, like family members and employees, and external clients, like lenders, investors, and partners. It should lay out the management structure of the operation, as well as the legal and financial structure of the business. Here again, state extension programs can provide resources to help develop an agricultural business plan, and the assistance of a skilled attorney can be invaluable.

Once a business plan is nailed down, the focus can finally shift to estate planning and retirement planning. The chosen legal structure and financial structure of the business can affect the transferability of assets, distribution of income, and how the income and estate is taxed. The laws that govern these things are ever-changing, so here again, a skilled attorney is worth their weight in gold to not only establish initial positions that are favorable to the stakeholders but also to adapt the plan to changing laws to make sure that the succession plan continues to accomplish the intended outcomes.  

Step 4 – Implement the Plan

Finally, a timeline must be established for implementing the changes laid out in the succession plan. Though the retiring generation may be reluctant to take a step back and let the incoming generation make decisions and learn from the outcome, whether good or bad, allowing them to do so while there is still time to teach may be the most effective option. If incoming generations remain mindful and respectful of the experiences and vast knowledge of the retiring generation, the operation can become even more competitive and successful while the transition is still underway.

Hard Work Pays Off

Ultimately, succession plans can be as unique as the operations they direct. In fact, the more individually tailored they are, the more successful they are likely to be because the stake-holders invested significant effort in creating a plan to accomplish their collective vision. Producers investing the time and effort to create effective succession plans will help to keep American agriculture from being lost to death and taxes. Ag & Business Legal Strategies can be a vital part of your planning team to help set your transition up for success! Contact us today!

Additional Resources

https://nationalaglawcenter.org/research-by-topic/estate-planning-and-taxation/

Sources

https://www.k-state.edu/kams/succession/basics/10perceptions.pdf

https://www.k-state.edu/kams/succession/basics/Transition_Planning-12_Steps.pdf

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