When Farmers are Done Farming: Tips for Succession Planning

Owning and operating a family farm is as much of a way of life as it is a way to make a living, so thinking about what happens down the road can sometimes go by the wayside. However, it’s important to make decisions about what will happen to your farmstead when you’re no longer involved…or the state will make those decisions for you.

Succession planning is the process by which you dictate how your assets will be handled upon your retirement or passing. A good succession plan addresses the 5 D’s:

1. Disability: preparing with legal and financial measures for a scenario where the primary person is no longer able to manage farming operations.
2. Disaster: contingency planning for emergencies. How will finances be divided if a huge repair is necessary?
3. Disagreement: creating conflict resolution strategies for how decisions will be made if a compromise cannot be found. It may be as simple as a majority vote or flipping a coin, but if it is written down as clear direction, it can eliminate ongoing feuds.
4. Divorce: protecting assets and business interests for both owners and heirs. Since Wisconsin is a 50/50 state – where assets get separated equally in a divorce – it’s important to incorporate payment over time to avoid the need to sell off all or part of the farm for an immediate payout. Be sure to include adult children’s relationships in this stipulation.
5. Death: ensuring your farm continues to succeed in your absence, for both the matriarch and patriarch of the family.
   

Clear direction in these five areas can help eliminate potential issues.

Farms Have Unique Needs

When it comes to farming, there is often a blurred line between personal property and business assets. The vast majority of farmers also live on the property with ownership getting passed down through generations. This can foster emotional ties and familial connections that create unique circumstances around how succession planning is handled.

First, much of a farm’s value is likely held as land, livestock, or equipment rather than ready cash. It may not feel like substantial wealth in operation, but when you consider the worth of the entire business versus simply what is in a bank account, the total value can be significant regardless of the amount of cash changing hands.

Additionally, not all heirs want to be involved in the farm. We often advise farmers during estate planning that “fair doesn’t always mean equal.” It can get complicated quickly, even in the best of circumstances with multiple children and extended family who have traditionally gotten along well.

This blurring of the lines between what is deemed personal property and where the business begins also adds complexity to the process. For instance, it might make sense to set up specific designations for your assets, creating a will or trust to specify transfer of personal assets while establishing an LLC or other legal business entity to protect the business side of your legacy.

Considerations

The first step in succession planning is to think about your end goal. Many farms function as a family business and may need to think about how to divide assets among multiple heirs. Early conversations with an experienced team of advisors can help avoid conflict and maintain family harmony. Some questions to consider include:

• Will you retire? If so, what does that mean to you and what will it look like? Where will you live?
• Would you prefer to sell the land or gift your farm to an heir?
• Do you want to be involved in choosing and training your successor or would you prefer to let someone step forward on their own when the time comes?
• Would you like to keep the farm in the family or isn’t that as important as other considerations?
• Are there multiple children and a surviving spouse that might be interested in carrying on operations? Does it make sense to divide duties or assets?
  

In the end, this is a very personal process, and decisions should be made to match your vision of the future.

Getting the Pieces in Place

The good news is you don’t need to figure it all out yourself. An experienced succession planning professional can help you clarify your vision for the future, provide additional options for how things could look that you may not have considered, and offer a range of suggestions for how to reach your goals and make all the puzzle pieces fit together. There is no one-size-fits-all solution.

It’s a good idea to create a team of advisors who can guide you through the process. We suggest gathering the following people and professionals:

• Estate Planning Attorney who has experience with farms
• Accountant/Bookkeeper and Tax Preparer
• Financial Advisor
• Insurance Agent
  

Not sure how to start assembling this team? Your ag business lender at Lake Ridge Bank can help! Our community bankers work hard to establish long-term relationships from purchase through retirement/succession and can often provide referrals to trusted partners with the experience to guide you through the succession planning process.

In addition, our involvement with your farm over the long haul combined with our expertise behind-the-scenes means we can often anticipate the timing of these conversations. We consider it part of our job to recognize areas in your farming business that need attention or updating to ensure your family’s farming and financial assets get passed on in a tax-sensitive and legally sound way.

Next Steps

In summary, we recommend the following steps:

• Assemble a team of professional advisors. Consider your ag business lender a resource for referrals.
• Look into the benefits of separating personal and professional assets.
• Establish a will or trust to avoid probate.
• Create documents that designate a Power of Attorney for finances and healthcare decisions if needed.
• Don’t delay. The cost of not doing anything or waiting until a tragedy forces your hand could be catastrophic. If there is no plan in place, probate will take 3-7% of your estate’s value and will delay any distribution 3-6 months or more. Your farm could dissolve in the meantime and your heirs could be left with little value and strained relationships.
• Write it down. Telling a loved one or trusted confidant your intentions doesn’t count. There has to be legal documents in place to be binding.
• Review every 5 years. No plan is set-it-and-forget-it. Circumstances change, and your succession plans should reflect those changes over time.
  

You’ve built something worth continuing. It’s too important not to handle with care. You can remove some of the stress of succession by creating a clear plan that lets you control your family farm’s future. Talk to your ag business banker for more information. We’re here to help you succeed.

Authors: Christine Sperry, CFP®, Vice President-Wealth Officer & Steve Eager, Market President