Legacy planning best for farm succession
By Kylene Scott
At least one out of five farmers doesn’t have a clue what will happen to their farm if they should die or have to stop farming. With the large amount of assets involved in a farming operation, why wouldn’t one have a plan for the continuation of the farm after a death of an operator?
Speaking at the recent Commodity Classic, Bryce Knorr, senior editor for Farm Futures magazine, was part of a panel for the “What to do now for a successful farm transition” session. He was joined by Darren Frye, president and CEO, Water Street Solutions; Arlan Suderman, senior market analyst, Water Street Solutions; and Brian Hensley, legacy advisor, Water Street Solutions. Knorr recently surveyed farmers about their farm succession plans.
“Less than half of farms actually have a plan. For the most part what this plan is some sort of estate plan or some sort of will,” Knorr said. “But it’s not really something for making sure that the farm continues as an entity and what’s even more important that it continues as a going business concern.”
Knorr said farmers are excellent at protecting their assets, and farmers hate paying taxes while they’re alive and the idea of paying taxes when they are dead is not the most thrilling concept either.
“You have to take the next step to really develop a plan for transitioning the business,” Knorr said. “If you do have a plan, mostly it’s—well son, or daughter, or son-in-law, or nephew or whatever, this is how I do things. These are the guys I deal with. But you really haven’t sat down and developed a plan to how they take over the responsibilities.”
Most importantly, specifics must be decided on as to what the plan is after one is going to step down and how long the process is going to take.
“One of the things I also find important is you have to pay for any professional training for your successors to make sure that they have the skills that are going to be needed to run the business and those skills are changing rapidly and they’re going to change even more rapidly in coming years,” Knorr said.
Sooner rather than later
There is never a magic time to start the farm transition planning process, but sooner rather than later is better, Hensley said.
“The sooner you start this process, the younger you are, there’s more options when it comes to who can transition the farm,” Hensley said. “There may be people who need more training so we have more opportunity to do the proper training. You just take options off the table every year you wait to do this process.”
Three things need to be done to start the planning process. First, open a dialogue.
“You’ve got to start having conversations with the people this is going to involve. Whether that’s a spouse, the children, the other stakeholders, your landowners you rent from,” Hensley said. “You need to open that dialogue and have a conversation.”
The second thing is to build a team of experts that can help navigate the process. Experts include: attorneys, CPAs, a financial planner, and an insurance individual. The Farm Service Agency office also needs to know what planning is going on as well.
The final step is to keep it urgent.
“In farming it’s easy to lose this as something you need to keep doing,” Hensley said. “You need to keep focused on this because it’s more urgent when you’ve got a plan. It’s easy for this to get pushed aside and not keep it as urgent as it needs to be.”
Frye agreed with Hensley. Even though the paperwork is tedious, the sooner things are laid out, the better. And the earlier specifics are decided the more options are available.
“The longer you go with the less options that are available, and so you have to take that seriously,” Frye said. “You guys have built a great business; maybe you’re the third, the fourth, generation, maybe the first. But those generations after you are counting on you to not only transition, but to have somebody succeed you and make sure that we do the proper tax planning because the government doesn’t spend money wisely.”
However the process does take time, and there will be multiple meetings.
More to it
When discussing succession planning, an estate plan is part of the plan as are wills, trusts and other things to take care of the assets. Passing of the skillset is just as important as well.
“A lot of times as we do an estate plan that’s where we stop,” Hensley said. “What won’t happen with a successful business is that business won’t continue or be thriving because we pass the assets. We also have to pass the skillset, and that’s where we fall down.”
And that’s where the challenge often begins, he said. Once the person is identified who will be stepping in, they will have to get up to speed on the skillset. The decision-making process and skill set is just as valuable to the operation as are the farm’s assets.
Without having a plan, a farmer is playing Russian roulette for the succession of the farm.
“You really increase your odds of having a successful legacy if you develop these plans and work through the issues you’re going to have to work through,” Knorr said.
Suderman said the legal side of transferring assets is one thing, same with the land. The land will “always” be farmed in one way, shape or form, but the relationships or non-relationships that exist after the transfers might be the hard part.
“The land will be farmed. It will be part of the business and will everybody still be speaking and happy and content with each other—maintaining the goals of the operation?” Suderman said.
Training is another hurdle to overcome, especially when one’s idea of training is to “follow me and do what I say.”
“That works real great until all of a sudden the one who’s been following and following the orders is in a position of making the decisions and has never learned the decision-making skill,” Suderman said. “(They) never learned to handle the responsibility. Never learned the goals of the operation or the vision of the operation and has never been given that opportunity to exercise and make mistakes.”
For an operator it’s hard to let the successor make mistakes, especially if they are the same type of mistakes made in the past, but the successor needs to be allowed to have the opportunities and responsibilities to lead the farm.
As mentioned before a lawyer, accountant, financial planner and insurance person needs to be involved with the planning process, but is there a person to start with? Knorr said to lead off with the one you like, you trust and the one that has the best interest at heart.
“The person you trust the most, and have them help build your team,” Knorr said.
He suggested finding an attorney who is an estate-planning expert.
“The hardest part for us in this room is we’ve also got to find someone that’s an ag expert. That understands agriculture because farmland is not like every asset that walks in an attorney’s office,” Knorr said. “It’s not stocks, it’s not bonds, it’s not something you just put on a piece of paper and you divide by the number of siblings and there’s your solution. So you’ve got to have someone who understands that component.”
Knorr also said to find someone who facilitates all those relationships and someone to act as a coach as well to help the family focus and set goals for the family.
“Individually those four individuals may not want to spend time on what I call the soft side of this, which is really about identifying what mom and dad’s goals are,” Knorr said. “You know, retirement’s a dirty word in farming. We don’t like it. But let’s try to define it so we do like it, and let’s let everyone know what retirement might mean for us.”
Knorr warned that none of those people are probably going to specialize in those areas, and that’s where an outsider can help facilitate some of that.
With the team assembled, it might also be helpful to have a successor chosen and have them “clued in” on your plans. Suderman said this needs to be a priority.
“You need to schedule time, and I know how you hate to do this on the time, but you need to schedule regular weekly meetings with that individual so you can go over the goals of the operation, the plans for the operation and allow for that individuals strengths to come in as well,” Suderman said. “Start incorporating those individuals strengths, where their skills are and start building some areas of the farm.”
He suggested giving them an area that they can develop, sticking with their strengths, but if that’s not the case, there might be trouble.
“You can have a successful business operation if you allow for some flexibility in the operation around that individuals strengths and give them some of the opportunities to develop those skills and develop that skill set,” Suderman said. “Then as you are working through that, find some reasons to be gone at some times to allow them to deal with the operation.”
By giving the successor responsibility in a particular segment of the operation they can make mistakes and learn form them. However, Suderman warns, meet on a regular basis and talk through things. Make it a learning experience.
“When you’re meeting on a regular basis you’re able to do that and that person starts feeling some sense of ownership and you can slowly transition the decision making of the operation,” Suderman said.
In-laws might also be a part of the process, and Frye said the best policy is to be transparent with everyone in the plan. A little different from being honest or telling the truth, it’s “like letting someone climb around in your mind.”
“Anybody this touches, they need to be in the meetings,” Frye said. “Some of your kids won’t like your decisions and if the in-laws aren’t involved in this, it’s so important to be transparent. They will go home and they will tell their side of the story, and now you do have a problem because they build a case against an unmet expectation, disappointment and this happens all the time.”
And as leaders, Frye said, parents have to take the ball and run with it to ensure the children get along after the planning process is complete.
“I have children. I have grandchildren already,” Frye said. “We want our kids to get along when we pass away and we can have a hand in that if we’re proactive and transparent, and so this communication is so important. Someone needs to lead it and that someone could be you.”
In the end
Hensley said there is often never a good time for a child to talk to their parent about the plans for the farm’s succession. Starting the conversation is one of the hardest parts.
“One of the things we’ve talked about is you never control what your parents do. Parents for some reason think they can control what happens below them and estate planning’s kind of the same way,” Hensley said. “You can’t make your parents have a conversation about this if they won’t. What’s pretty successful for a lot of families is explaining to the older generation why that conversation needs to happen.”
Working with a family in western Illinois, Hensley encountered a situation where a son was having trouble getting his parents to start a succession plan. The son was passing up on land purchases because of the uncertainty with his parents’ situation. Eventually Hensley and his colleagues coached the son about how to approach his parents.
“So we did some coaching and talked about explaining to mom and dad and the reason we want to have this conversation isn’t because we’re greedy, we don’t care if we get anything we just need to know what the plan is so we can take action on our own future for our kids who want to come into the farm,” Hensley said. “That changed the dynamic. Now it wasn’t about planning for me it was more about planning for that next generation.”
Bringing up the next generation can break the ice and remind them the act of planning the farm succession is not out of selfishness, but providing a game plan so the next generation behind them could farm.
“It’s crucial to the farm that this conversation happens,” Hensley said. “But at the end of the day, it’s there. They’ve earned that right not to share with you what their plan is or isn’t. You just have to try to explain to them and develop that sense they need to have a plan and its really effective to you and your future, and your grandkids’ future. Those grandkids hold a special place so let them pull those strings a little bit too.”
Kylene Scott can be reached by phone at 620-227-1804 or by email at firstname.lastname@example.org.