Despite the rise of corporate farms in the United States, the U.S. Department of Agriculture reports that 97% of farms in this country are family-owned, and 88% of all U.S. farms are small family farms. Research suggests that most family farmers—about 80%—intend to pass their farm down to the next generation. A study out of Iowa State University indicated that half of farmers did not have an estate plan, and nearly three-quarters had not chosen a successor to take over the family farm business.
Family farmers are not alone in the tendency to put off estate planning, but that delay can have a disastrous outcome: by some estimates, fewer than a third of family farms continue into the second-generation, and only about 12% continue into the third. Lack of planning is often a primary reason.
You may imagine your children working side by side on the family farm, continuing to build the legacy you left them. Even if this rosy vision materializes, it won’t do so organically. With most businesses, including family farms, the torch does not pass seamlessly from one generation to the next without a lot of communication and planning. Let’s talk about the steps in family farm succession planning.
If you’re reading this blog post, you have probably reached the first stage of planning for your family farm and home: realizing it needs to be done. You may have come to this realization gradually after decades of successful farming, or suddenly, after an accident, sudden illness, or death of a partner, or even in the face of a pandemic financial crisis, like Covid-19.
Whatever the reason behind your decision to begin the transition, the first thing to do is get your ducks in a row. Put your hands on the relevant papers: review deeds and land titles carefully, take a good look at insurance policies and any other ongoing contracts. Ensure that farm assets are titled as you remembered and that no changes need to be made before you move forward.
Another issue to consider: the business entity of the farm. Is it a sole proprietorship? A limited liability company (LLC)? Would another arrangement provide better protection for the business and its assets during or after the transition? Is a farm trust necessary? These are questions for an estate planning attorney familiar with family farm issues.
After you have thought about these issues, communicate with your adult children or other heirs. You may have a successor in mind, but make sure all of your heirs are on the same page. You may assume off-farm heirs are not interested in your plans for the family farm and home, but you might be surprised to learn otherwise. Failure to keep everyone in the loop can breed resentment and cause unnecessary rifts between your heirs. Assure everyone that they will be treated equitably in terms of assets, if that is your intent.
Almost all estate planning attorneys recommend that you divide your estate equally among your children. If the family farm is the primary asset, this may pose a challenge that you should discuss with an estate planning attorney for family farmers.
Succession planning for a farm involves planning for both farm assets and farm operations. Transitions in both of these areas are best accomplished over the course of a few years.
Ideally, your intended successor in the family farm business is already working full-time on the farm. If not, that’s an important transition to begin. Don’t assume that a child who grew up on the farm and is familiar with the chores is ready to seamlessly step into ownership of the farm, home, and business.
Your successor should be able to move from working alongside other employees on the farm to assuming a management role, and ultimately into running the entire operation. If you have the time for a gradual transition of this nature, you will be able to impart important knowledge to your successor, as well as gain confidence in their ability to carry on the family farm business.
Equity in a family farm business may build over generations. These operations are capital-intensive, and transitions of ownership involve complex tax implications. These may not be immediately apparent to the owner of the farm business. The difficulty of untangling the financial issues, not to mention the relational ones, causes many family farmers to put off succession planning. This is an understandable impulse, given the amount of other obligations owning and running a farm involves.
Unfortunately, as we’ve mentioned, putting off family farm succession planning increases the risk that the transition will be a chaotic or messy one at best, and a disaster at worst. Making the transition as smooth as possible, and minimizing the tax burden on your heir(s), is a process that takes time.
Working with an experienced family farm succession planner as soon as you identify the need to plan expands your options and reduces the burden on your heirs. Don’t wait until it’s time to retire or until you can no longer manage the farm operation. Beginning the planning process now increases the chances that the farm legacy you have built will survive you.