Putting the ‘Success’ Into an Effective Succession Plan

Posted on: June 26th, 2024 by
Transitioning a Succession Plan to a Successful Plan.

If you’re an older farmer with land and business assets, or even a younger one who owns property and you’ve started a family, chances are you’ve worried how those you leave behind will be taken care of after you’re gone, and how your farm’s legacy will live on.

While I encourage anyone to write a basic last will and testament with an attorney’s advice, farmers and business owners generally need more than that, in the form of succession planning. Its aim is to establish the means by which you will transfer your farm or business to heirs or otherwise set up an exit strategy from the operation. Among business owners, farmers particularly feel a special tie to their property and especially want to see its purpose continue, within the family line if at all possible. A succession plan is the most effective way to achieve those goals.

Why a Succession Plan?

Several decades ago, Mother Nature often reminded farmers at a younger age it was time to pass the reins to a younger generation. Agriculture was more taxing on older generations who didn’t have the equipment and technology we do today, plus there seemed to be fewer roadblocks and expenses for the children of older farmers to work in and then take over the family operation. The Farm Crisis of the 1980s removed a lot of generational wealth from farm families and sent many would-be farmers and ranchers into off-farm careers.

Partly because of this—and the tax consequences associated with transferring property while still alive—many farmers who were able to keep their land continued actively managing it for a longer time, until a child or grandchild showed ability to take over management. If this did not happen, they sold it or they bequeathed it to heirs upon death. According to Iowa State University figures, two-thirds of the state’s farms are now owned by people over the age of 65 and almost 40 percent are owned by those over 75.

Of course, emotions also play into planning for the future of one’s land and operations. There’s an old saying that if you love what you do, you’ll never work a day in your life. While this may not strictly be true when it comes to the many demands of a farm, the fact is that farmers enjoy the work and the sense of purpose and accomplishment. For this reason, many find it difficult to imagine stepping back and giving up control even to a trusted heir. This is even harder if the farmer doesn’t feel confident in a clear heir to take over.

Another major factor is the requirement to face one’s own mortality, since we are not a culture that comfortably discusses death. But careful planning is necessary to ensure the legacy of your work lives on, and that your heirs are well cared-for and face fewer financial consequences as recipients of your estate.

Basics of the Succession Plan

Your succession plan begins with a clear balance sheet that lists your assets and liabilities. You may want assistance with this from a local financial planner or certified public accountant (CPA), if you don’t already have one with whom you work. They can also provide you a written reviewof the tax consequences of your decisions—for example, if you wish to sell or transfer any assets while still living—and an evaluation of what your assets are realistically worth.

Next, what is the intent of your succession plan for heirs? This depends not only on their desire to farm or manage the operation, but also on your comfort with their ability to do so. Is there one child who is clearly qualified to take over, but you worry you cannot divide assets enough to keep the farm intact for them and still provide your other children with an equitable inheritance?

Situations like this require tough conversations. I advise speaking with each of your intended heirs to make your wishes clear and ask their opinions, and perhaps even holding a family meeting to discuss options and get feedback. This is not something you should leave unsettled at your passing. I’ve worked with farmers who say, “I don’t want to deal with who gets what; they can sort it out after I’m gone.” This has led to far too many siblings seeing their last civil conversation take place across the grave.

As an example, one farmer I worked with arranged for his real estate holdings to be put into a trust when he died, to be accessed and managed equally by his children. He set it up so if one of them needed to withdraw from the assets, the other three siblings received equal payouts. This gave all incentive to participate in management of the farm and its revenue stream, as well as equal say on any loans to be taken out on the properties. He understood his children had the sort of relationship for which this worked best for them, but you may need to set up your plan differently—and that’s all right.

Next, consider the urgency of your need for a succession plan, and realistic financial considerations. Are you in good health that gives you time to plan? Or are you ill? Is your spouse or a child ill? Has a child passed on and left a spouse or grandchild who may need immediate assistance? Do you need to plan for any gifting or transfer of assets in your lifetime, or will you leave it all until your passing? In this vein, it may be helpful to consider your assets in separate groups rather than a mass inheritance. For instance, farmland value tends to remain evergreen, while the state-of-the-art tractor you just purchased could be obsolete in 10 years thanks to technological upgrades. Perhaps you should transfer equipment sooner than later to a farming heir, while they can use it.

Another consideration might be if you mandate that the farm continue to be operated as it is under your management and, if so, specifically in what manner. For example, if you have dairy cows but your heir has no interest in cattle and would rather focus on pigs or row crops, will your plan allow them to make that change? Whatever your decision, it’s a good idea to leave at least some flexibility in the succession plan so your heir(s) can adapt to challenges and market forces you cannot foresee.

Your Situation May Vary

Farmer contemplating how he wants to plan his farm's succession.

The above information tells you some standard things to keep in mind when mapping out a succession plan. But every situation is unique. For instance, what if you have a child who does not manage money well because of an addiction beyond their control, such as drugs or gambling? You may not want to exclude them from an inheritance—but also not give them access to a large amount of cash that could lead to harm.

Or, what if you don’t have children or siblings? Maybe you have a trusted farm manager you would like to help be able to purchase your assets so the farm continues on, and they can enjoy a savings or tax breaks instead of having to buy an entirely new property. Or, maybe you would like to gift your property to a university or foundation, but also retire at some point with an income stream until your passing.

Perhaps you want to retire and watch your heirs take over so you can travel, spend time with grandkids, and do other enjoyable things while you can. The attorneys and financial professionals of Ag & Business Legal Strategies can work with your CPA and even your own family attorney to help you create the best succession plan that preserves tax advantages for them, while ensuring an income for you and planning for the possibility of your own elder care down the line—or address myriad other situations.

The most important thing you can do in beginning a succession plan is to make certain your farm operation is well-run and profitable, so you have something positive to pass to the next generation. Whether you are at the beginning of your farm ownership career or somewhere later on the timeline—or you’re a spouse who has inherited the farm and struggling to manage assets and provide for children and grandchildren—ABLS can help make sense of all the moving parts and set things on the right path for succession.

At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy.

Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.

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