Originally published by Michigan Farm News on January 6, 2016; republished with permission.
With the fall harvest complete for most farmers, now is a good time to give some thought to an estate plan and farm succession plan.
As farmers know, maintaining a profitable farm operation is difficult. It can become a daunting task when you start to consider passing the farm to future generations. Nonetheless, one of the biggest priorities for most family farms is that the farm will continue for future generations.
A few years ago, the Cooperative State Research Education Extension Service estimated that approximately 70 percent of farmland in the United States would be under new ownership by 2028. In a cautionary note, that organization indicated that without the proper succession planning, family farms are more likely to cease operating or be acquired by neighboring farms. Similarly, another survey found that 26 percent of farmers said they were unsure who will take over their farm. For farmers age 60 to 69, 15 percent do not yet know who will take over the farm. Without proper planning, you may be setting your successors up for failure because only about 30 percent of family businesses survive to the second generation.
In my experience, the biggest problem that many farmers face is waiting too long to start the process. For some, this delay may be a result of not wanting to potentially change how the farm has historically been operated. Perhaps the mention of limited liability companies or other entities is confusing. While many succession plans utilize entities to provide legal protection or to assist in the transition process, there is no one-size-fits-all plan. For others, the delay may be a result of not knowing where to start. In any case, succession planning and estate planning do not need to be overwhelming undertakings.
Some questions you will need to consider include: Should the primary farm operator sell the farm during his or her lifetime? Who will manage the farm after the primary operator's retirement or death? Who will own the farm after the primary operator's death? Will farm and non-farm children be treated equally? Do you have sufficient non-farm assets so that non-farm children are treated equally, if so desired? Are there estate tax concerns for the first generation?
Regardless of your situation, at some point, you will need to engage in both the succession planning and the estate planning process. Your estate plan and succession plan will need to be appropriate for your family's situation. Both your succession plan and your estate plan may change as circumstances change down the road. One thing is for sure though, the sooner you start the process, the more likely it will be that you accomplish your objectives.
So, if you are enjoying a little extra down time this offseason, use that time wisely and consult with your attorney, accountant, and other family business advisors to put an estate plan and a succession plan in place for your family farm. It may be the most important thing you do this winter.