Tips on designing a farm succession plan

Listen to Mom and Dad's goals for the farm first. You might be surprised.

COVID-19 has forced many farmers to take stock of their farm succession plans. Here are tips on that process from two experts.

The initial meetings to design a farm succession plan should take place with the patriarch and matriarch to make sure their goals and objectives are on the same page, says Brandon Dirkschneider, certified financial planner, Insurance Design Management, Blair, Nebraska. Mom and Dad often have a good read on who in the next generation has the business and management skills to make decisions so the farm can succeed. The next generation, including on-farm and off-farm children, join a later meeting to hear their parents’ goals for the farm. “If the kids hear Mom and Dad say it, there's not so much bickering and fighting when they are gone,” explains Dirkschneider.

The older generation goes over what they've accumulated over their lifetime, how the farm has gotten to this point, and what kind of cashflow it takes to make profit from the operation. At that point, says Dirkschneider, they can say, “In order for this farm to succeed for future generations, Johnny is going to get 60% of the farm ground and the rest is going to be divided between our non-active kids with cash rental agreements in place, because he needs every acre to cover his costs and still afford to raise his family.”

Unfortunately greed often sets in with non-active family members, says Dirkschneider. They may have jobs with a company retirement plan, employee benefits, and wages, where the active farm child only has sweat equity.

“Start transitioning wealth while parents are still alive,” says Dirkschneider. There are different tools and techniques, such as family limited partnerships limited liability companies, or gifting certain parcels outright. “As soon as you've identified a family member that is going to be the successor of your operation, and they've been there long enough that you know they're not going anywhere, that's what you have to start building out that plan.”

Create a mentorship relationship between you and your on-farm children. Don’t treat them as general labor and never teach them how to make management decisions. Let them market grain and livestock, help with tax planning, and make decisions on crops and expenses. “The farm families that are successful are the ones that are mentoring and teaching that next generation along the way,” says Dirkschneider.

He works with one fifth-generation family who allows the kid coming back from college to make all the choices on 80 acres of land.

Developing a succession plan requires building a team, he points out. You need an estate planning attorney, CPA, property and casualty insurance people, and a certified financial planner that understands the agricultural marketplace.

“The pandemic has given everybody a new perspective on getting their ducks in a row,” says Dirkschneider. About 70% of farm families don't have a written estate plan, let alone a succession plan, he says. “If you look at the average age of the American farmer, in the next 20 years 80% of the farm ground is going to change ownership. And 70% of those families, don't have an estate plan.”

Insuring your future

Insurance is one way to keep the farm unit intact, yet be fair to those that are not coming back to the farm, says Tony Jesina, senior vice president of insurance for Farm Credit Services of America. A second-to-die life policy may fund some equalization, allowing people not a part of the farm to be compensated, while keeping the asset base to continue. “That way you don’t have to sell land to equalize the estate with the non-farming family members,” says Jesina.

You need to update your transition plan often, he says, because families change frequently as people get married, divorced, and have kids. “Sometimes the parents say we are going to give the farm to the person on the farm, but other kids are going to get the life insurance policy,” says Jesina. “That way the dollars are meant to come out equal. That’s one way you can fund an estate transition.”

Long-term care policies are often non-existent or underfunded by farm families, says Jesina. As a result, nursing homes and other care facilities can end up consuming the assets you are trying to transition.

“If there is any type of blessing with the pandemic, this environment has caused more people to be aware of what they have for a plan. Will my plan cover me if I get sick because of COVID? Farming is dangerous itself, let along having a pandemic. There is a renewed sense of urgency around evaluating your plan. COVID has opened a lot of people’s eyes that we are all vulnerable. It’s easier to bring that conversation up now. We all realized we are all more vulnerable than we originally thought.”

The hardest part of the transition process is getting everybody to the table, especially the ones that own the majority of the operation that needs to be transitioned, says Jesina. “Dad may have a plan, but it’s in his head. His will may have been written back when the children were little, providing for them equally.”

Every year producers review and update their operating plan. That same thing should happen with a transition plan, says Jesina. You need to have a review. The current administration changed the tax laws, capital gains taxes, and estate tax exemption limits. If that administration changes, those tax laws could change or expire in 2025.

Learn More:

Brandon Dirkschneider:brandon@insurancedesignmanagement.com

Tony Jesina: tony.jesina@fcsamerica.com

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