Designing your farm succession plan for maximum success

Succession planning is a complex process. You can develop an effective plan by addressing the component parts, and you don’t have to do it alone.

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When you think about succession planning, what comes to mind? A common question is ‘what should be in my trust? or how should I write my will? In reality, succession planning encompasses a process of transferring your farm from one generation to the next and requires more than simply estate planning. Most successful succession plans begin transferring the farm long before its current owners are gone.

Farm succession consists of transferring three parts of the business – assets, operations and management. Planning involves identifying methods by which these transfers happen. Assets that need to be transferred can include land, equipment and cattle, as well as shorter term assets, like feed and inventory. The operations of a business generates income that will eventually flow to the junior generation through business ownership. Management involves completing day to day tasks, make essential decisions and take responsibility for the farm.

Transferring the parts of your business

Succession plans can be as simple as progressively transferring a percent of ownership from senior generation to junior generation. This can occur by the junior generation buying into a business or by gifting them percentages of ownership. Under this arrangement, assets and operations are transferred together.

Alternatively, asset transfer and transfer of operations can be separated. Separating can increase flexibility and optimize a variety of available transfer tools. A new business entity – often an LLC – can be created for operations and a limited set of assets. The junior generation can gain a degree of ownership in this new entity, while the senior generation can retain ownership of their farm assets. The income from operations flows to all owners of the operating entity, which include the junior generation. This entity then leases, purchases, and/or is gifted ownership of any remaining assets.

Succession plans can also be customized by mixing and matching transfer methods. For example, equipment can be leased, while cows can be sold in an installment sale. Meanwhile, land is often held through death and distributed to the next generation from an estate. Each of these methods has its own tax implications. Transfer methods and taxes should be considered in the planning process.

A key component of a succession plan is that purchasing the farm generates both financial security for the exiting generation as well as an opportunity for the upcoming generation to be successful. This can be managed by analyzing a farm’s ongoing capacity to provide funds for a senior generation’s financial needs against debt payments, taxes and family living. The transfer plan can then be customized to match both generation’s needs.

When land is the only remaining farm asset in an estate, arrangements for transfer to farming heirs can be managed in some straightforward ways. Often, farming heirs pay non-farming heirs a stated value, which is often lower than market value of the land. Payment terms have a variety of options, including a lump sum payment or a series of payments over time.

Don’t forget management

No matter the decisions about transferring assets and income, transfer of management must not be ignored. Managing a farm requires many types of tasks and decisions. Managing operations is often thought about first, but financial, personnel, marketing and information management must also be considered, too. Transferring management can be a progressive transfer of tasks, decisions and responsibilities. That transfer can start in one area and progress through others. Alternatively, management areas can be handled together with the junior generation taking on more responsibility for decision making over time.

Many obstacles exist for transferring a farm when there is no succession plan. Disagreements between heirs on estate assets and how to split them can cause farms to completely dissolve. A succession plan can make a transfer process much smoother and more successful. Any way you choose to do succession planning, be intentional. Determine your plans, have your documents written, and fully implement all your steps.

There is assistance available to your farm

This may feel like an overwhelming undertaking. It does to many farm families. However, there is an array of professionals that can assist in this process. A lawyer is useful in creating effective succession and estate planning documents. An accountant can assist in assessing the tax implications. A farm succession planning consultant can be extremely valuable in guiding your family through development of a successful farm succession plan. Michigan State University Extension also has a variety of resources available, including their Farm Business Management website, which provides access to a variety of useful articles and tools. Your MSU Extension Farm Business Management Educator can also answer questions as your family works through a succession planning process.

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