Business Of Agriculture: Transitioning The Farm To The Next Generation

Business Of Agriculture: Transitioning The Farm To The Next Generation

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Monday, December 1, 2014 - 10:00am


By Karen Macdonald

Farms and ranches are valuable enterprises, both for the food they provide and for the equity accrued over time in their assets: land, equipment, facilities and livestock. With 87 percent of America’s farms and ranches family-owned, these assets are often passed to the next generation. This transition process is rife with operational, financial and interpersonal considerations; a comprehensive succession plan is essential to managing the issues effectively.

Most farms and ranches are ongoing enterprises, with seasonal activities, established processes and long-term relationships with buyers, lenders and vendors. The primary operator of any agricultural business undoubtedly knows everything there is to know about running the farm or ranch – but does the family member who expects to take over? Parents may be hesitant to transition control of different aspects of the operation, or not even realize all the nuances they know about the operation that would benefit the next generation. Transitioning operational responsibility in advance of, or in time for, parents’ retirement will ensure continued operation of the enterprise. Letting go can be hard, but for long-term viability, it’s important to give your successor the time to learn how to run the business you’ve built. Farmers should also keep in mind that just because they’ve turned over management, doesn’t mean they’ll be left out in the cold. For example, Lee Kayhart is one farmer who’s transitioned his farm to his son, but still helps out regularly, running tractors and combines when he’s not travelling.

When an estate is passed to the beneficiaries, there are usually inheritance or estate taxes to be paid, and the greater the value of the estate, the higher the taxes. This can be an enormous financial drain, and in some cases the beneficiary may not have the liquid cash to cover the tax bill – in agriculture, this could mean having to sell part or all of the very farm that’s been inherited in order to raise the money for the taxes. Danny Logan solved this issue by selling his operation to his son, with whom he’s been partners for decades, putting the farm entirely in Stephen’s name but continuing to work side-by-side with him every day. Transferring ownership over time is another approach, and one taken by farmer Lee Watson. “You hate to think about it, but you need to plan,” Lee says, “so about three years ago we started passing shares of our farming corporation to Dusten.” Their goal is to have at least half of the shares transferred by the time Lee retires.

Apart from the business aspects of operations and finances, a family farm by nature involves family. Transitioning the family business to the next generation can raise a great many issues that, if not resolved can cause family strife. For example, the family home is often situated on the farm – with the parents still living in it. If the farm is transferred to the next generation, what happens to the home? What about siblings who choose to pursue other careers – how will they be treated fairly if the farm itself is being transferred to just one child? How will the family ensure there are enough financial resources to care for the parents as they age? 

Many of the issues surrounding succession planning are complex and can be emotional. Working with an outside consultant can facilitate open, honest and respectful dialog; in coordination with tax and financial consultants, you can design and enact a succession plan that will protect your family as well as the farm or ranch you’ve dedicated your life to building. 

If you’d like to learn more about succession planning, contact your local Farm Credit office.