By Amy E. Ebeling
February 24, 2023
About 98 percent of U.S. farms are family-owned, according to the U.S. Department of Agriculture. So most farm owners are not surprised that an important part of farm succession planning is balancing the expectations of and promises to their children.
In drafting a farm succession plan, the farm owner will be asked to make the ultimate determination of what assets will transfer to which successors and how. Along with many other challenging conversations, farm families can be paralyzed by deciding between children—deciding whom the farm goes to and how it happens.
There is no one right answer; each family’s farm succession plan will look different. But most successful farm succession plans have a common theme—transparency. From the time children leave the farm, to the time that one or more children begin managing the operation, open conversations can help. Discussing the expectations of each individual—mom, dad, on-farm siblings, off-farm siblings and others involved in the farm—and the rationale behind those expectations helps ease the ultimate transition.
Not all individuals may agree on the final decisions but having conversations well in advance of the transition helps minimize the surprises and misunderstandings that can sow discord in farm families.
Be sure to include three topics.
- the farm’s true financial picture
- the contributions and compensation of both on-farm and off-farm children
- the needs or wishes of what a transition will provide for mom and dad
Along with minimizing surprises, open conversations help ensure family members can make informed decisions about careers and financial plans.
The farm’s finances and future viability are crucial to understanding if or how the farm will be passed on to the next generation. Farming is a capital-intensive industry but much of that capital is tied up in necessary farm assets such as buildings, equipment, animals or inputs. Therefore a farm balance sheet may show an extensive estimated net worth but—unlike non-business assets—division of the farm’s assets can completely change the cash flows and viability of the operation. All parties should discuss the reality that it may not be possible for the next generation to buy out the operation at its current scale. But changing the operation or selling irreplaceable assets like land may leave it unviable as well. A family may need to discuss whether a multi-million-dollar operation on the balance sheet can be divided—and what the impact might be on liquidity, future expansion plans and cash flows.
Contributions from and compensation of both on-farm and off-farm children need to be considered. Some farm families have a promise, whether spoken or unspoken, that an on-farm child’s “sweat equity” will be repaid when the farm transitions. Salary, wages and benefits may reflect that; but again they may not. The agricultural industry runs heavily on trust – to some lawyers’ chagrin. But an explicit conversation about compensation expectations and job duties of on-farm children ensures that all parties understand the agreement at the forefront. Similarly the parties may want to consider how the operation has changed because of a certain individual’s involvement. For example the farm may have been able to expand operations in a way that it couldn’t have done without that individual’s time or expertise. Between on-farm children, consider whether a child “acts like an owner” with time and decision-making. It’s wise to take that into consideration when passing on managerial power or control of the farm. Those conversations may happen initially between the current generation in ownership and the on-farm children but off-farm children should not be totally excluded. Explaining the rationale and recognizing the off-farm children’s needs or expectations mitigates surprises and allows all family members to plan accordingly.
The ultimate decision will be impacted by the needs or wishes of the current owners. Conversations should occur concerning retirement aspirations, long-term care costs if needed, and general desires or feelings about the legacy they leave. The farm must often come first but for some the path forward may have different priorities or needs. Ultimately it’s the owners’ decision about what and how to transition the farm. Having those difficult conversations with all impacted family members allows each to be fully informed as they chart their course for the future.
Transferring a farm operation to one or multiple children requires difficult conversations about the expectations and goals of each family member. Contact an attorney to help address concerns that arise from those conversations, and to identify legal options to preserve, divide or simply value an operation.
© 2023 Agri-View. Madison, WI. Reprinted with permission.
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