Is there a right way to transition the farm to the next generation?

Problem: 

My husband and I recently met with our adviser to discuss farm succession strategies. We thought we’d learn how to phase out of the farm operation in the next five to seven years so our farming son could buy our machinery and take over the daily management. However, the conversation quickly shifted toward our estate planning. Now, I’m confused on what farm succession entirely involves. I just know we don’t have a plan to gracefully exit the business, nor to keep the farm together when it goes to our three kids. It’s a lot to take in! Should we focus on moving the operating assets and day-to-day responsibilities to our son first? Or is it better to start on our farm estate plan?

— Submitted by email from L.L. 

Solution:

Sometimes, when I ask my teenage son a direct yes-or-no question, he likes to frustrate me by answering, “Correct!” Unfortunately, that’s the same answer that comes to mind here. Both components are important, but if I had to choose one, I know where I’d begin. Here are my thoughts.

Which poses the bigger risk if not completed? 

Transferring the daily operation may take several years to complete due to financial situations, business goals, and tax implications. What if you become incapacitated or pass away during the transition period without an estate plan? Would your farming son’s ownership of the operational assets have any impact on what your other children determine to be a “fair” rent? Would his management control of the operation really matter if you were to die without a plan to keep the land together?

Buy the slice or build the bakery? 

Most farm heirs are hungry to gain equity. Parents often try to help by selling them at a discount their machinery, livestock facilities, or land. While not inherently bad, this ties up the farm heir’s cash flow, and parents pay tax on the sale. In contrast, what if your son were to inherit those assets through your estate strategies in exchange for non-farm assets going to his siblings? This would provide certainty, free up his cash flow, and allow him to re-depreciate the farm assets upon your death. 

In the bigger picture, should farm heirs buy a slice of the existing family pie? Or should their cash go toward new assets outside the operation to build a bigger bakery? Would this change how you transfer the operational assets today?

Could the long view improve your short game? 

Transitioning the day-to-day operation means setting expectations for income, control, and your level of involvement. You need to map out the key business roles and identify how, when, and to whom those roles are transferred over the short term. 

Farm estate strategies establish how and when you want to transfer your life’s work, which requires a long view. You need to coordinate your assets, ownership, valuation methods, and distribution strategies through your estate documents, so you can put each of your kids in the best position, whether on or off the farm.

In my experience, operational transfer decisions become clearer once the long-term vision is cast. Farm heirs (and their spouses!) have more buy-in on the daily operation when they know their farming future is secured through the next generation.

Transitioning the daily operation and defining the farm estate strategies do not have to be mutually exclusive. But if I had to pick where to focus first, I’d begin with the end in mind.