Farm transition and succession – Why bother?
Nearly all farms aspire to pass the farm on to future generations, but many fail to make adequate plans to do so.
In my work with farm families for nearly thirty years, as a Michigan State University Extension dairy farm business management educator, I have observed that it is nearly unanimous among all farms that the most important goal of the producer is to pass along the farm business to the next generation. Despite this intense desire, various research studies and surveys indicate most farms fail to make adequate plans to achieve this important goal. For example, a Farm Journal survey found 80 percent of surveyed farmers plan to transfer control of their operation to the next generation, but only 20 percent of them were confident their succession plan would achieve that goal. A study conducted by Iowa State University showed that 50 percent of farmers did not have an estate plan and 71 percent of retiring farmers had not identified a successor.
With these statistics in mind, it is not surprising the Small Business Administration reports less than 33 percent of family-owned businesses survive the transition from the first to the second generation and only half of those making the first transition survive the transition from the second to the third generation. This means that only about 16.5 percent of family-owned businesses successfully survive to the third generation. One USDA study also predicts that about 70 percent of the farm land in the U.S. will change hands within the next two decades. Further, the average age of the U.S. farmer is now over 57 years old. From 2002 to 2007, the number of U.S. farmers age 55 and older increased by 17 percent while the number under age 45 decreased by nearly 21 percent. In essence, more and more farms will be transitioning to the next generation soon.
The landscape is also changing a variety of factors that impact passing the farm on to the next generation such as inheritance and tax laws, an increasing variety of estate planning tools, new types of business entities, skyrocketing land values dramatically increasing estate values, fewer farm children choosing to return to operate the home farm, increasingly stringent environmental rules and regulations, and the fact that many retirees in this day and age will spend a quarter or more of their life in retirement. All of these factors increase the importance of farmers formulating a farm transition and succession plan.
There is no doubt that formulating a viable farm transition and succession plan is a major undertaking. Formulating a viable plan is a challenge because it requires farmers to wade through a wide variety of laws and regulations and involves something we all resist: change. Perhaps the greatest challenge is that it involves and requires communication between family members about topics that many find very hard to discuss in an open fashion: death and finances. Given the emotional stress involved it is no wonder there is a great deal of resistance by many farmers to develop a transition and succession plan.
The stakes are just too high not to formulate a plan. Make no mistake about it, upon your death your estate will be passed on. Even if you plan on your heirs continuing to operate the farm business, if you don’t formulate an adequate transition and succession plan your heirs may be doomed to failure as they are forced to liquidate assets in order to pay taxes and fees. Or, you might be setting them up for failure as they are forced to partition assets to satisfy the desire of non-farming heirs to “cash in” their share of the farm business. Another forgotten aspect of the plan concerns the capability of the next generation to operate the business on a day to day basis. If your transition and succession plan is not preparing them in this important aspect failure is almost certain. A written farm transition and succession plan is also an important instrument for your lender(s). Lenders are much more likely to lend needed funds if your farm has a written and well-thought out plan. Finally, farm transition and succession is undoubtedly a potential source of conflict among family members. Many farm families have been torn apart as the farm was passed from one generation to another. The existence of a written farm transition and succession plan may not prevent this from happening. However, the more time and effort you spend in allowing all of your heirs to provide input to your transition and succession plan the more likely that transition and succession will be a triumph rather than a tragedy.