The Basics of Succession Planning
Ease the transition to the next generation with careful preparation
It can be hard to find the time to talk to your family about a succession plan. It’s a long way off, you might rationalize, and there are cows to be milked and repairs to be made. It can also be uncomfortable thinking about ending your involvement in the operation and handing control over to your kids, or other family members — or selling it.
Find a way to make the time. It’s important to have a solid plan in place for transitioning your farm to the next phase. It’s the only way to make sure it’s done the way you and your spouse want it, with fairness to all and a minimum of emotional pain and conflict for your family.
What you should know up front
Succession plans are different from estate plans. Estate plans concentrate on the tax liabilities faced by your heirs and the various ways to lessen the tax burden. Successions plans focus on the future of the farm and are an integral part of an estate plan.
When a farmer has decided to retire, there are essentially four directions the farm succession plan can go:
- Transfer or sell ownership to a vested family member while maintaining fairness for any off-farm heirs, with equal settlements of money, stock or other assets
- Liquidation of farm assets, i.e., auction off the equipment and livestock, and sell the land
- Rent or lease the land and equipment
- Find a successor to operate the farm, and sell or land contract the property to him
Determine the desired end result
Rather than focusing on the process of the transition, experts recommend that you first concentrate on the final outcomes of the succession. Among the important questions you should think about: What do you and your spouse want to have happen to the farm? Do you want to stay involved with the operation on a smaller scale? What kind of income do you need for retirement or health care costs?
“You also need to think about your family’s role in the transition,” says Donald G. Schreiber, JD, CLU, ChFC, Director, Advanced Sales for Nationwide Financial Services, Inc., Columbus, OH. “Succession planning can be an emotional minefield. You’re not only considering the fate of valuable assets but also managing a family legacy that might go back several generations. Everyone will have an opinion, and things can sour quickly if family members feel they’re not being treated fairly.”
If you have a family member who could and may want to take over the operation, you should be comfortable they have the knowledge and skills to run it profitably. Also think about siblings who might want a piece of the farm. Are you being pressured to sell by those who don’t share your love of the land?
Getting it right the first time
Succession plans sometimes fail because of a variety of risks that were not thoroughly considered during the planning stage. These include inadequate cash flow, liquidation of some assets to provide for retirement, poor estate planning, unresolved issues between family members or a successor who’s not prepared to lead and manage the farm business.
That’s why it’s important to enlist the help of qualified professionals who have no stake in the final decisions. They can help you make sound decisions in the best interests of everyone without getting bogged down in the emotional issues of succession. These persons might include:
- A financial or estate planner specializing in farm estate planning
- A moderator or arbitrator to help with family discussions
- Your banker to help with finance resources
- Your accountant who has income records and projections for your business
- Your personal attorney, or one who specializes in tax issues
Many resources are available online that can help you with your initial planning. Farm Journal, for example, has an entire section on its website devoted to succession planning. Its Legacy Project has various tools, checklists and resources to help you with this often difficult but ultimately rewarding task.
