Passing on the farm can be a complicated and daunting process. Familiarizing yourself with these basic succession planning concepts can be a great place to start.
This resource is provided for general informational purposes only. It does not constitute professional legal advice and may not apply to your specific situation. Consult with professional legal counsel before making any decisions about your business.
According to the USDA, only about half of U.S. farms have a succession plan in place. That’s a shame, because research shows that producing one increases farm financial performance and encourages good farm management, all while providing the peace of mind that comes from knowing your legacy is secure.
Whether you’re leaving the farm to a family member, an employee or someone outside the business, effective succession planning is about more than just the legal and accounting legwork involved. It’s about proper communication and keeping family harmony intact, ensuring that the business ends up in capable hands, and laying the groundwork for the present and future success of the business in general.
What is farm succession planning?
Farm succession planning is the process of intentionally transferring ownership of a farm to a successor. In addition to the legal, financial and managerial decisions involved in preparing a farming business for transfer, farm succession planning can also be a highly personal process involving tough conversations and decision making within the family.
What steps are typically involved in farm succession planning?
Step 1: Open lines of communication and build consensus
Open lines of communication among family members and begin conversations about the future of the farm sooner rather than later.
Remember that good communication involves not only speaking but also listening and acknowledging each other’s concerns. Encourage family members to define their personal, family, and business objectives, including operational efficiency, financial security, work-life balance, and preparing the next generation for leadership.
This might also be when you start identifying potential successors, which can involve having difficult discussions about who wants to remain involved in the farm business. Reaching a consensus on these key goals is essential before moving forward. If any disagreements or incompatibilities come up, consider working through them with the help of a facilitator.
Your local ag extension can be a valuable resource here, connecting you to information, tools, seminars, and guidance from experts with experience dealing with your line of work and farms with similar acreages.
Montana State University’s Transferring Your Farm or Ranch to the Next Generation guide is a great resource for navigating inter-generational issues that might arise at this stage, while Land for Good’s Strategies for the Junior Generation guide provides valuable insights for farmers from the younger generation in particular.
Step 2: Get your financials and paperwork together
Gather together all of the farm’s financial records, including financial statements, tax returns, bank and investment records, and structures of the family enterprise.
Ensure all of the farm’s assets and liabilities are documented, including detailed information about land ownership (e.g. title references, acreages, mortgages), vehicles and equipment, livestock, inventory, improvements to property, contracts and insurance policies.
Be sure to collect any legal wills, powers of attorney and other legal agreements that are relevant to the business as well.
Read more: How to Make Farm Recordkeeping More Efficient
Step 3: Analyze the farm’s financial position
Getting your finances together is important because it helps all parties understand the business‘ current financial position and debt levels, project future cash flows and profitability, and ultimately determine whether the business can support additional households and provide for retirement.
If your business doesn’t currently produce financial statements, you might consider hiring an accountant to help you perform an inventory and take stock of the business’ financial position.
Read more: How to Read an Income Statement
Step 4: Evaluate your options with an expert
With help from a succession planning expert or a legal professional, start thinking through the nuts and bolts of how the succession process should progress. Evaluate the different methods of ownership transfer available to you (such as purchase, rent, or gifts), legal arrangements (including wills and powers of attorney), and tax strategies.
Evaluate each option based on financial impact, stakeholder alignment, practicality, respect for the current owner’s retirement goals, and potential dissent among involved parties. Make sure to also think through unexpected events like future family disagreements, economic externalities and disasters.
A professional with experience dealing with farmers with similar acreages and lines of business can be invaluable when navigating these complex decisions.
Step 5: Start drafting a detailed succession plan
Draft a detailed written succession plan for the farm business outlining what exactly the family wants to achieve–preferably with help from a lawyer or succession planning expert.
This plan might include a cover page and an executive summary, and sections addressing retirement plans, management and ownership transfer strategies, financial planning for the business, implementation timelines, and contingency measures.
Drafting a succession plan can be a highly iterative process: it’s normal to revisit earlier decisions, this time with more information and a trusted facilitator or advisor on hand. Once a comprehensive draft is ready, it should be reviewed and discussed openly with all parties.
Step 6: Implement and monitor the plan
Share the plan with all family members: a sense of openness and shared responsibility can go a long way, helping avoid misunderstandings and ensuring everyone feels included in the process.
Every good succession plan should have a clear timetable, which should be closely followed, with responsibilities understood clearly and carried out diligently. When issues arise that require changes to the plan, it’s essential to stay flexible and open to adjustments.
Farm succession planning: some key terminology
Depending on how formalized your business already is and how much thought you’ve put into succession planning in the past, many of the terms you encounter during this process could be new to you. Some important succession-related vocabulary to get familiar with includes:
‘Business entity’
Your choice of business entity–i.e. whether you’re set up as a sole proprietorship, partnership, LLC or corporation–affects both the management and transfer of a farm business, with each structure offering different benefits depending on the business’s goals.
Increasingly, farm operations and real estate are held in separate entities, allowing for more flexible management and ownership transitions. Entities like LLCs and partnerships enable gradual ownership transfers, while sole proprietorships require complete transfer at once, and corporate entities often separate ownership from management more distinctly.
‘Operating agreement’
Any new or existing business entity needs an operating agreement that outlines who has the authority to make business decisions, how those decisions are made, and how management responsibilities will shift over time. They might also include information about asset transactions, financial arrangements, party inclusion and transfers, contributions, management roles, and profit allocation.
‘Buy-sell agreement’
A buy-sell agreement, often included in an operating agreement, outlines how ownership will be transferred in events like death, disability, disaster, divorce, or dissolution. It should include fair valuation based on agricultural value, reasonable payment terms, and flexible timelines to ensure the next generation can realistically meet the agreement’s conditions.
‘Sales contract’
While buy-sell agreements lay the foundation, additional sales contracts are often needed to ensure the smooth transfer of operating and real estate assets.
Operating assets are typically transferred over five to ten years through internal financing or third-party loans, and sales should be documented with written agreements that fairly reflect both tax and book depreciation. Real estate–usually transferred later due to its higher value–can be leased, purchased in installments, or financed with a mortgage, but the key is having a written contract that offers legal protection beyond a will.
Contracts are more secure than estate planning documents (see below), which can be changed unilaterally, so it’s important to discuss real estate transfer options early. Transfer agreements can also include guaranteed payments or deferred compensation, giving the senior generation financial security and the junior generation flexible, manageable payment terms.
‘Estate plan’
An effective estate plan should address legal and health care decisions through documents like powers of attorney and health care proxies, while also considering the timely transfer of assets to protect them from long-term care costs.
Gifting assets during the senior generation’s lifetime can offer financial and tax advantages, though it may forgo the stepped-up basis benefit available at death. Ultimately, the goal is to complete most of the farm business transfer during the senior generation’s lifetime to ensure a smoother transition and greater security for both generations.
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