Ag Succession Planning: Don’t Wait Until Tomorrow
5 Common Mistakes to Consider When Transitioning Your Farm
Back in the day, but not all that long ago, farmers inherited farms from their parents. These transfers happen today, too, but come with numerous business challenges and implications. Read on to learn more about some of the most common mistakes when it comes to transitioning your farm to the next generation, commonly referred to as succession planning.
Mistake #1: Waiting too Long to Begin Succession Planning
As the saying goes, “Failing to plan is planning to fail.” Those who are 65 and haven’t started this process are already behind the 8-ball. You must start early!
Succession planning across all industries takes a lot of time, but agriculture has its own complexities to consider. Most farmers with large, successful operations don’t have a lot of cash on hand. Cash is often rolled back into the farm, impacting cash flow. Farms typically also have more equity tied up in assets than in other industries. These characteristics mean that more time is necessary to plan and execute a successful transition of ownership.
Maybe you can predict the future, but I certainly can’t. Starting the succession planning process late can make it impossible for your farm to continue after you pass away. I’ve seen it first-hand and recommend starting to plan in your early-to-mid 40’s. If you have children that are getting close to college-age, now is the time.
Not only must you start early, but you need to know your future goals for your family and the continuation of your farm.
Mistake #2: Ignoring Family Dynamics
Part of starting early means getting the house in order, so to speak. It’s common for the next-generation of farmers to stick around to help mom and dad grow the farm but not grow themselves. This means that when the farm is ultimately transitioned, one challenge the next generation may face is getting a leverage model in place. Significant benefits to the management of your farm can come from the next generation obtaining off-the-farm education, training, and skills.
Your setup of ownership, processes, procedures, and overall operations can be greatly beneficial, but can also cause issues. In a multi-generation farm, one of the grandkids might look around and say, “Grandpa owns everything; Dad doesn’t own anything yet; I’m not sticking around because there’s nothing here for me.”
Structuring your legal entities can make navigating family dynamics much easier. Even if you haven’t solidified every detail like retirement, who is managing which aspects, etc., leveraging the right structure early on enables you to make quicker and more effective decisions.
Mistake #3: Not Having a Will or Trust
A good business practice that goes hand-in-hand with succession planning is having a will and a trust. Wills are designed to protect your family, your farm, and other core assets while outlining exactly what should happen after your passing. Trusts are designed to provide you and your family with legal protection for your (the trustor’s) assets and to ensure the proper distribution of these assets based on your wishes. Trusts can also be a vehicle to avoid probate at your death, which can have very large estate tax implications and savings. Keep reading to learn more about estate tax.
The bottom line is that you should have a will and a trust. Having these tools in place can mean the difference between your farm flourishing or withering when life-altering events occur. If you don’t have these tools, put a will and a trust at the top of your priority list. If you have a will or trust, but haven’t updated either in a long time, revisit the documents and update as appropriate.
Mistake #4: Ignoring Estate Tax Implications
According to the IRS, the estate tax is a tax on your right to transfer property at your death. Today we have an estate tax exemption, but that doesn’t mean we always will. Federal administration priorities shift, and that means estate tax exemptions may be lowered. If you live another 20 years or more, I predict you’ll see changes in estate tax implications.
Mistake #5: Doing Things How You’ve Always Done Them
Some farmers struggle to manage their farm like a true business. I tell our clients this all the time, “you can’t farm like grandpa did.” Because of the market and price volatility in our economics today, part of this switch includes monitoring costs and knowing your break even.
For example, when you plant wheat, it might be selling for $4.50. But when you harvest, it might be selling for $3.20, but you needed to sell for $3.65 to break even. Opportunities to lock in high prices through active marketing are out there. You must know the selling price you need to break even and account for where you can make a profit! Working closely with your CPA to achieve these objectives is absolutely necessary for today’s uncertain environment.