Ag Succession Planning: Don’t Wait Until Tomorrow
6 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. If you are considering passing your farm to the next generation, also known as succession planning, it’s important to be aware of potential pitfalls to make the transition as smooth as possible.
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.
Starting the succession planning process late can make it impossible for your farm to continue after you pass away. Ideally, start the process in your early-to-mid 40s, especially if your children are approaching college age.
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.
The bottom line is 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. When it comes to estate planning, there is a common notion that time will always be on our side. However, as the sun begins to set on 2025, a unique and golden opportunity for the tax-efficient transfer of wealth is also fading. This circumstance is rendered even more critical with the ongoing market volatility, marking an opportune moment to optimize taxable estates before the market returns back to normalcy.
Mistake #5: Doing Things How You’ve Always Done Them
Some farmers struggle to manage their farm like a true business. 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 $7.50. But when you harvest, it might be selling for $6.20, but you needed to sell for $6.65 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.
Mistake #6: Overlooking Diversification & Risk Management
Depending solely on a single crop or livestock might prove detrimental. Embrace diversification by venturing into different crops, integrating crop-livestock systems or exploring agritourism. Additionally, secure insurance policies for potential risks like drought, pest infestations or market downturns.
Transitioning your farm to the next generation is a monumental task that requires planning, adaptability and open communication. By avoiding these common mistakes and embracing proactive strategies, you can ensure a positive transition and a prosperous future for your family’s farming legacy. Contact an Adams Brown advisor to learn more about succession planning and how we can aid in the transition of your farming operations.