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Preparedness key to minimizing human-related risks on the farm

Tragedies occur and can be detrimental to a farm operation, but too often farmers neglect risk management because it requires thinking about events that are both unfortunate and unexpected, according to a Purdue University expert.

Many things can happen to friends of friends, community members and neighbors. But what happens when a death, disability or divorce hits home? Will the farm continue operating? How will it affect loved ones?

"Contingency planning is crucial to the survival of a farm business after a disaster because it can reduce the impact to a farm business from a divorce, disability or death," says George Patrick, Purdue financial planning and tax specialist, in a university report.

Contingency planning includes identifying risks and finding solutions, cross-training personnel and paying self-employment taxes.

The first step is to identify those events that are not likely to occur but, if they do, could have significant adverse consequences for the farm operation. The next step is to take those identified events and develop an action plan to reduce risks and deal with them if they occur. It is crucial to follow through after the planning stage, Patrick said.

"In some instances, contingency planning may cause us to make some fairly dramatic changes in the way things are organized," he says.

Another key step for many farm businesses is to provide cross training for all employees and others involved in the operation. Cross training is the process of informing and teaching others about the daily tasks and responsibilities of a specific position. The training process also makes people aware of what others on the farm are doing and what needs to be done on a regular basis.

"For example, the owner of a crop farm was paralyzed in an accident. The owner also was the one responsible for operating the planter. So when planting season comes, no one involved in the operation is familiar with the machinery used or planting preferences," Patrick says. "Cross training would have prevented this problem and allowed the crops to be planted on time.

"Cross training helps get things done when things go wrong."

A death or disability within most farm operations often leaves the family with little or no income.

By paying self-employment taxes, the farm operator could qualify for disability coverage and survivor benefits under the Social Security system. But in reality, some farmers do not pay enough self-employment tax to qualify for disability coverage or survivor benefits.

"The self-employment tax is what the individual that works for themselves pays into the Social Security system," Patrick says. "In order to be covered for death and disability, you have to be paying in on a regular basis, essentially 50 percent of the time in recent years.

"Many times people are in a situation where the farm may not be showing a profit as far as the self-employment tax is concerned. And either they don't pay in or they only pay in under the optional farm method. Because of inflation, that only gives one-quarter of coverage per year. As a result, if this happens very often the farm family would not be currently insured and eligible for those benefits."

For a survivor to be covered, the operator has to have six of 12 quarters paid and, for a disability, 10 of 20 quarters need to have been paid. In addition to paying self-employment tax on at least enough earnings to get two quarters of coverage for Social Security, it is beneficial to carry private disability insurance.

In addition to death or disability, farmers also should plan in case of a divorce.

"Too many times the farm gets split or cannot operate as it once did because of a divorce," Patrick says.

Arrangements such as a prenuptial agreement can be made. This can restrict a non-farming spouse's access to the farm assets if a divorce were to occur, Patrick says.

"We all assume the older generation is going to die first, but what happens when our assumptions are wrong?" he says. "A death or disability has the potential to halt the daily business of a farm. The impact is minimized when there has been some planning for the unexpected."

Tragedies occur and can be detrimental to a farm operation, but too often farmers neglect risk management because it requires thinking about events that are both unfortunate and unexpected, according to a Purdue University expert.

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