What farmers and farmland owners should know about succession
Succession is not everyone’s favorite topic. In farming, succession normally means passing on land or farm operations to a family member, heir or employee.
This process takes a lot of time and effort, involving research, key decisions and very likely finding a trusted advisor to help walk you through each step of the succession process.
There is a lot of ground to cover when discussing farm succession planning. A good advisor will help you tackle issues that moving on from farm operations and ownership entails, including deciding what to do with land, machinery, buildings, other equipment and more. Additionally, there are tax and financial considerations that are involved, too.
But don’t get bogged down by how much work is involved in this planning. It’s important work to do. Here is a brief overview of what farmers and farmland owners should know about succession and how to plan for it.
Why you should plan for farm succession
Let’s answer the most important question first: why.
Farm succession planning is a necessary, important process. It’s takes a lot of effort to maintain a farm, let alone remain successful in agriculture over the years. It also takes plenty of foresight to start thinking about farm succession.
There are two primary reasons to think ahead on the topic, according to a farm succession planning guide from FarmProgress.
First, it helps farmers and farmland owners set themselves up to continue the lifestyle they desire after they have stopped operating and owning a farm. Second, it allows for the creation of a roadmap toward passing on the farm to family or future generations, if that’s what is desired.
This planning also makes the entire process of the farm ownership changing hands, which truthfully is inevitable, more controllable and less easy to disrupt should anything unexpected happen.
How most farmers handle succession
In most cases, farm ownership shifts from one generation to the next. In fact, more than 90% of agricultural landowners plan to pass ownership of their land to the next generation. They plan to accomplish this through a variety of methods, including wills, gifting, trust ownerships or sales that occur between family members.
Farm owners will want to build a team, too. That will likely include an attorney and a tax professional (continue reading to get to that fun topic) to make sure the farmer is gets the best advice possible for their situation. Some farmers also bring in farm managers to help handle other operation logistics.
Current owners should also begin to have conversations with those they wish to transfer ownership to when the time comes. This could be a hard conversation to have, especially if it involves family. But having the discussion with the entire family as early as possible can help make goal-setting much easier, as well as the transition itself.
Set goals for your succession
Goals are necessary for plans to be carried out properly and efficiently. Defined goals can help the succession process by establishing roles for your successor (or successors) and those who may still have a real interest in the ownership transfer.
Goals will differ from farmer to farmer, but in general, good goals to consider include how to distribute ownership among children, establishing a continued cash flow, generate retirement income, avoid probate proceedings, protect land and keep tax consequences to a minimum.
Consider more than just land and equipment
If you want a farm to be successful no matter which generation owns it, then you need to consider much more than simply transferring land and equipment ownership in your planning.
As any business owner knows, there’s much more than meets the eye when it comes to building and maintaining a successful business operation. There’s a wealth of knowledge and business sense that needs to be passed on to future owners, as well, if they’re to have the best chance possible to achieve success. Farming is no different from other businesses in this regard.
The problem is that farmers are not always taking business knowledge into consideration when they are planning the succession of their business.
In its guide, FarmProgress notes a study that found only 30% of farm families have a succession plan in a written document. Of that percentage, only a third has any sort of plan for transferring knowledge of how to run the farm business on to the next generation. Instead, it’s mostly just on-the-job, general explanations that are being relied upon.
That could be a mistake. Current farmers and farmland owners should help future farmers connect with professional managers or others who can help them get the training that they need to have the most business knowledge possible, FarmProgress argues in its guide.
Consult a tax professional
Taxes and how to handle them will need to be discussed throughout the farm succession planning process. Inheritance taxes could need to be paid by heirs when they take ownership of the land.
However, there are ways to keep the transition smooth and painless - at least as painless as tax issues can be, of course.
Landowners will want to do their research on the federal estate tax, which applies to estates with assets over $5.49 million. Married couples have a combined exemption limit of $10.98 million. Heirs may need to pay the federal estate tax if your combined assets exceed the exemption limit. That’s 40 percent over the limit.
Additionally, landowners should be aware of any state estate or inheritance taxes that could exist. In the U.S., 14 states have an estate tax separate from the federal estate tax, while six states require an inheritance tax.
A tax professional can help you determine ways to reduce how much taxes your heir may need to pay once the land ownership status changes. This can include gifts or creating a trust.
Partner with a professional
While you are considering a succession plan, why not build your farm into the most successful operation possible? Partner with Midwest Land Management and Real Estate Inc. to ensure your farm is set up for success long into the future - even after you have transferred ownership.
Let’s talk about your personal and professional goals and how we can help you meet them.