Passing down the farm: Strategies, ideas, and real-life solutions

When Macomb, Illinois, farmer Kendell Litchfield, 57, got a call out of the blue one evening last March, it surprised and pleased him. His son, Ryan, 23, wanted to come back to the farm.

Ryan had been indifferent about farming growing up, says Kendell (pictured at right with wife, Suzanne). He'd earned a college degree in business finance, had married his high school sweetheart, and was working at a bank in Naperville. "We thought that was his path and that's great," says Kendell. "We encouraged him to pursue his passion."

Ryan seemed apprehensive about the response he would get when he called, says Kendell. "He felt like it might be a letdown that he wasn't using his education. I told him college was about becoming an adult, and certainly, you can come home."

Kendell set about figuring out how to work Ryan into the succession plan. "His timing couldn't be more perfect. I have two key employees, and one of them wants to slow down and retire." He decided not to make any drastic changes for two years. During that time, Ryan will be a third employee while Kendell teaches him management of the farm and the numbers side of the operation.

They are working on a web-based farm management platform so they can have real-time insight to profitability at the field level. "It would be difficult to have Ryan take over spreadsheets I created over the years, so I thought we might jump into this new platform. It's going well," says Kendell.

Harvest, which consumes so much time and energy, will be a test of Ryan's desire to farm, says Kendell. "After a couple of harvests, if farming is his passion, good, and if not, he is young enough to pivot into something else. I'm not going anywhere. It's more important to enjoy what you do than aspire to do something for your father or just chase dollars."

What's The Best Way To Transition?

Down the road from the Litchfields, Steve and Cathy Onion are working on a succession plan with their son, Austin, 26. The Onions have a row-crop and cow-calf operation near Industry. When Austin graduated from college and came home, he rented two of the farms Steve previously farmed. He makes all the decisions on marketing, seed, fertilizer, and chemicals. He trades out his sweat equity for machinery use.

"Austin is eager to buy ground, but we reminded him it took us a while before we could invest," says Cathy. "It's capital-intensive for a young person to start crop farming by buying land and equipment."

Steve, 60, worked alongside his dad until 1984, when his father died of colon cancer at age 50, after a four-year battle. At 24, Steve farmed the ground his parents owned and acres he and his dad crop-shared for longtime landlords.

"Even though his dad couldn't be here, he sure surrounded himself with great men who became advisers and mentors to Steve, and that was a tremendous gift," says Cathy.

When Austin came back, Steve told him the first year was his best worst year. It was the best year because he got to farm with his son. It was the worst year because it was so wet the planting didn't get finished until June.

The Onions are trying to figure out the best way to transition the farm to Austin, but it's a work in process. They have an older daughter, Tayler, who has a career in Florida. They want to be fair to her while assuring the continuation of the farm.

Cathy met Mike Downey and Steve Bohr of Farm Financial Strategies in Lisbon, Iowa, at an ag banking meeting and set up a series of consultations. The last time Downey visited the farm, Cathy asked him to draw scenarios on sheets of poster paper, which she keeps taped on the kitchen wall as a reminder.

"Inertia is so easy in this process, because there's no one right way to transition a business to the next generation, and it can get cumbersome and complicated," says Cathy. "You need to talk to the attorney, the accountant, the insurance agent, and the financial planner. Mike has been our accountability partner. It was too easy to say 'I will look at this tomorrow.' "

The Onions' plan is still in process, but half the battle is starting the communication and the plan. "Steve recognizes life is short," says Cathy. "You don't want to be 80 years old and finally be able to retire."

Hammered in death tax

Illinois farms can "get absolutely hammered in state death tax," says Bohr. Farmers need to address that situation in their succession plans, whether through gifting, discounting, leasing, or something else.

"Landowners are an older population already, and then you throw in COVID," says Bohr. "They are thinking, 'What if I get this virus and die? What does that mean to the farm and my legacy?' The virus is making people more conscious of their mortality."

When Bohr and Downey meet with farm families to talk about succession planning they invite parents, on-farm kids, off-farm kids, and spouses – anyone who has a stake in the farm. "Most of my peers think I'm crazy to include spouses, that it's asking for trouble," says Bohr. "But I believe it's the other way around. You're asking for trouble by excluding them in those discussions."

The biggest threat

In western Pennsylvania, Darlene Livingston knows what can go wrong and right in farm transitions. She is a farmer and executive director of Pennsylvania Farm Link, which finds resources for beginning and transitioning farmers. Livingston and her husband, Bob, took over her family's livestock farm near Smicksburg from her father in 2013. "My dad was 80 before he wanted to talk about transitioning the farm. We did it wrong, but we accomplished it."

Most farm families don't have enough long-term care insurance to cover their needs, says Livingston. "The biggest threat to family farms is Medicaid liens, the five-year look back."

Livingston's father suffered from dementia and had to live his final months in a care facility. He died in 2016. "My father had two goals," says Livingston. "First, to preserve the farm. Second, that nothing would come between our family relationships. I have two siblings who are not going to come back to the farm, but they were extremely supportive to ensure the farm stayed in the family."

Read more: Tips on designing a farm succession plan

Don't put it off

Sarina Tannehill works with her father at Vlock Financial, a part of NYLIFE Securities. They specialize in estate planning with farmers and ranchers. She had a case where parents had two sons farming with them. The mother passed away and a year later, the father married again. His new wife said, "We should go to the attorney. I just want to make sure if something happens to you, that I'm taken care of." She became the trustee of his trust. One year later, he passed away and she changed the beneficiaries so her children from a previous relationship inherited the farmland.

You want documents to be irrevocable, says Tannehill. A QTIP trust guarantees that the children of an original marriage will remain as sole beneficiaries regardless of remarriage, meaning the primary children cannot be disinherited if either parent remarries after a spouse's death. "They never think it's going to happen to them," she says, "but you do crazy things when you're lonely."

Sometimes the dad and son farming together have a good relationship, but the son's wife doesn't think they are getting a fair shake. "A lot of parents ask us about prenups, and we stress how important they are," says Tannehill. In one case, the parents gifted all their land to their son. He got divorced and she got half the land. "The family actually had to rebuy the land back from her. It's like they paid for it twice," says Tannehill.

A farm estate plan might need to allow one child to inherit the farmland while another gets cash to make the transition fair. The best way to do that is usually through a second-to-die life insurance policy, says Tannehill. The on-farm child would be the beneficiary and then buy out his or her sibling. A buy-sell agreement and a specific insurance policy meant for estate equalization works great for this, she says.

Turn over decision-making

Steve Hamilton, an adviser with the Land As Your Legacy program at Nationwide Insurance, has personal experience in the importance of estate planning. When Hamilton's father had a fatal accident sorting cattle, the family farm survived. "Even though I had moved away, I knew what planning had been done and had a pretty good idea what was happening there," he says. "Dad had turned over the management decisions to my brother-in-law, so he knew what to do."

The family also had powers of attorney and health-care directives, says Hamilton. When his father was on life support, the family knew his desires. He had communicated them and formalized them in writing. "He had given us the authority to make the decision when that time came to remove him from life support. Those are not easy decisions, but when there is a legal document, it helps in a difficult time.

"The weakest writing is stronger than the best memory," stresses Hamilton. "If it isn't written down, formalized, and signed, I don't care what was said. A handshake is good until somebody becomes incompetent or dies. Then it falls apart."

Tight margins

Joy Kirkpatrick, outreach specialist, University of Wisconsin Center for Dairy Profitability, encourages farmers to hold back cash reserves to pay for long-term care needs. "A lot of farmers heavily reinvest in their farm, modernizing the dairy barn and building the herd, but they don't set aside large enough cash reserves for their long-term care," she says. They go in a nursing home and are told Medicaid will pay for it. After they pass away, the family finds out there is a lien on the property.

If the on-farm child or that person's spouse is doing the caretaking for aging parents – buying groceries, taking them to the doctor, or cleaning their house – place a value on that, she advises. It is keeping that older generation out of a long-term care facility and preserving some of that wealth.

Don't always expect to age in place in your current home, especially on dairy farms, says Kirkpatrick. "Your house might be closest to the barn and the livestock. The successor generation needs to be close to be able to check the cows in the middle of the night."

She also encourages kids who want to come back to work off the farm first. "It really helps for them to have that experience of someone else being their boss," she explains. "I've had parents say that terrifies them, because they're afraid the kids won't come back. That's the risk you have to take. Make sure the farm is in a good position for them to come back."

When they do come back, you don't want them to be an employee for 20 years without having any equity or ownership in the assets. She cautions: "Make sure the children have management responsibilities. Slowly move into ownership." Don't transfer assets until you make sure they're the best managers they can be; build those skills they need to have, she counsels.

Perfect storm

Farmers are uncertain this fall about elections and fear increased taxes, says attorney Dave Dvorak, Omaha, Nebraska. "It's a perfect storm that is getting people to come to grips with their mortality." We are in an unprecedented period from a wealth transfer perspective under the current law, he explains. Families can transfer $23 million of taxable value to subsequent generations tax-free. At the end of 2025, that exemption level gets cut in half. "There's no time like the present, because the exemptions are at an all-time high," says Dvorak. "That's a huge motivating force. People need to move. You don't want to be sitting on the sidelines right now."

The biggest mistake he's seen is when farmers think, "My kids will figure it out." That is based on a premise that they love each other and they'll come up with the best plan once you are gone. "That is a false assumption," says Dvorak.

The common threads of farmers who have done it right, he says, include:

1. They start planning early, probably in their 50s.

2. They are engaged in the process and committed to it.

3. They put the control of the operation, not necessarily ownership, in the hands of active family members.

4. They create exit strategies for inactive family members that don't cash-strap the operators.

"If you give the actives the ability to farm, while at the same time giving the inactives some economic stake, but not a controlling stake, and a way to monetize that in a fair manner – that's usually the recipe for success," says Dvorak.

What does the farm say?

Ryan Patton at Nationwide has a good suggestion. "If the farm was sitting at the dinner table with us, what would the farm say that it needs?" That takes away some of the hostility, he says.

Patton points out that the CARES Act allotted quite a bit of money to agriculture in 2020. That said, "Don't let your tax adviser be the one who makes all the calls," he says. Some people are restructuring their operation to maximize those payments. Make sure you are coordinating and communicating those decisions, he says.

Moving forward

Kendell Litchfield's transition plan was straightforward. "My plan A, B, and C were all the same when I got out of college: I was coming back to the farm." He started farming full-time with his father and uncle in 1985. "Dad and Uncle Maurice had bought some ground at the wrong time, and it was tough. Dad said he didn't know if we could make it work. I told him if it didn't work I would do something else. Thankfully, it worked."

No assets were gifted to Kendell. "What was gifted to me was an incredible example and knowledge, which is priceless," he says. Now he is transitioning what's required to run a farm to his son, but not assets yet. "As I look down the road, we are going to have to gift him. I don't know if there is any other way." The Litchfields have a daughter, Katie, who has no plans to farm. "It is challenging to assist one child and make it equitable for the other," says Kendell. "My goal is that my kids' relationship stays strong. Harmony in our family is important in our decision making."

Kendell relies on good relationships with landowners he has nurtured over the years. "You don't just pass that off to your son. He has to build those relationships."

He doesn't want to make drastic changes to the operation and then find out Ryan doesn't want to stay. "I don't want him to feel like he can't back out of this. If he stays that will be awesome, and if he leaves I will be fine with that. I will be happy because I know he tried it. Time will tell. We've got to get through this harvest season."

Finding someone to take over

John and Lori Latham have 1,200 acres and a 600-cow dairy operation in the rolling hills near Boscobel, Wisconsin. Their two sons are pursuing other careers, and the Lathams are ready to transition into retirement. They contacted Mike Downey, Farm Financial Strategies, about helping them transition the farm to new owners.

"Hopefully we can get matched up with a couple and get the business transferred," says John, 62. He purchased his parents' farm years ago by making monthly land contract payments. "My parents weren't subject to the capital gains tax; it gave them a steady income, and they were able to retire. This is what Lori and I are hoping will happen."

He is ready to retire. "We have been successful, but 35 years of this has been a long haul. It's a tough business to manage. I'm ready to do something different, physically and mentally."

Anyone transitioning in will need to bring some capital, says John. "They are going to have to work here for a couple of years to make sure they have the ability and the passion to run an operation like this."

The couple is willing to give up their home, which is 100 feet from the front door of the milking parlor. One option is to sell the house and dairy operation, but retain ownership of the land.

"I would be more comfortable getting rid of the whole farm," says John. "But what's going to whack us is that capital gains tax. If we can find somebody to make the transition, it creates a good situation for both parties."

The couple isn't looking to live the high life in retirement. They have a camper and like to fish and hunt. "We want to sit on a sandbar on the Mississippi River with friends," says Lori.

"The financial pressures in the dairy business these past four or five years have been pretty hard to get your head around and accept," says John. "It's teaching me life lessons to be able to handle the next thing that happens."

10 tips to make it work

Gene Greuel, 64, and his brother, Jere, 70, each successfully brought a son into the family farm in Industry, Illinois. Gene has a few tips for other farmers looking to pass down the farm.

1. Let the younger generation carve their own niche. Gene told his son, Austin, 38, that the farm couldn't support four families, so he and Levi, 37, Jere's son, had to find a side business. The cousins put up contract hog finishing barns and started a custom manure pumping business.

2.Encourage the kids to work somewhere else first.Austin worked for an equipment manufacturer for eight years before coming back. "That eight years was the biggest blessing," says Gene. "It made him appreciate the flexibility of the job here on the farm."

3.Don't be afraid to gift the farm corporation while you are still active. It's one of the only ways to pass down the farm today. Talk to your attorney and tax adviser. Off-farm heirs can be gifted parcels of land that can be rented back to the on-farm child.

4. Turn over management years before you retire."If you have a thumb over them and tell them every move to make, they won't be invested in it," says Gene. "I gave the boys advice for a while, but now they make most of the decisions themselves."

5. Listen to them. "I've learned," says Gene. "Us old guys think we know how to do it, but if you just sit down and listen, sometimes the new guys have better ideas."

6. Help them see the big picture."I remind the boys that there have been ups and downs ever since I started farming. Be ready for the downs when they come."

7. R-E-S-P-E-C-T."You can't expect them to respect you unless you respect them," says Gene. "I realize they are going to make mistakes. I made mistakes. They will learn from those mistakes."

8. Turn over the books. "Let them make the money decisions. You have to be ready to give that up."

9. Don't hold them back. When an elevator came up for sale, the boys were hot on buying it, and Gene was cautious. "I could have tried to talk them out of it, but I didn't. They went ahead, and it's worked out great."

10. Think positive."I was leery about Austin coming back to the farm, but it has worked out fantastic," says Gene. "It's been a real blessing."