Things to Consider Before Picking Heirs to the Family Farm
There are many concerns that farm families worry about, and it’s usually the same ones that pop up over and over, from family to family. If you’re worried about these obstacles, you are not alone. Which one of these sounds familiar?
Fair and equal treatment to heirs — How can we make our legacy positive and fair to all of our kids rather than a burden? For example, let’s say one child farms and three do not. How do we make sure that child can be successful while still being fair to our other children?
Senior Care and other financial burdens — How do we balance the farm with the expenses we know are coming and possibly some we may not anticipate?
Deciding who should take the lead in succession planning — Who is making the decisions?
Logistics — Now that we know what we want, how do we make it happen?
Several years ago I had a family contact me and they told me they wanted to work on a plan to pass the farm to the next generation. They had a son and a daughter. The son helps with the farm, and the daughter does not — she’s single without kids. My first question to the family is always how did they get the farm?
How a family inherits the farm is the most important starting point when you begin thinking about and discussing farm succession planning. It sets the conversation up in the right framework. When we understand where the farm came from, we can understand what’s important to us. Is it a farm that has been passed down for generations? Are we the first-generation owners or the 5th? What generational ties are knotted into the decision we are discussing?
This family continued to tell me about the farm, and explain how they came into running the farm themselves. The husband told me there were four siblings — three sisters and himself. He had always worked the farm with his dad, and it was a part of his upbringing and much of his young adulthood as well. The farm was ingrained in him. But, when Mom and Dad passed away, they had done zero planning for passing the farm down to him and his siblings. After they passed, he sat down with his sisters and asked them what they needed from him in order to feel like the succession was fair. They gave him an answer that not many people are as lucky to get.
“Give us each a dollar and we’ll call it fair,” his sisters told him.
“Is this how it is going to happen for you and your children?” I asked.
“Absolutely not,” the husband.
He’s right. There is no way that will happen nowadays. Farming has become a big business, the land is worth a ton of money, and everyone has Google to look it up. In other words, the details behind how you inherited your farm aren’t likely to be the way you pass it on to your heirs. It simply helps you paint a picture of what once was, and weigh the options through a more cohesive lens that distinguishes what’s important to you.
Alternatively, what do you do if none of your kids want the farm? —
Do you sell it?
Do you rent it?
How about charitable giving?
Do you have someone else that can step up and run the farm?
With the understanding that it isn’t as simple as it may have been for previous generations, how can we make all of this fair to our heirs?
Next, we must consider retirement and senior care along with other financial challenges. This is overlooked far too often. I once had a couple come to me where the man’s mother and stepfather had sold the farm to pay for their care. Mom was in memory care, Step Dad was in a seniors’ home. They were blowing through their assets because of how expensive these senior homes were. By this point, there unfortunately was little I could do to help.
I’m telling you this to emphasize the importance of planning early. When you plan early, you don’t have to lose the farm to creditors, nor do you have to sell the farm to pay for elder care. Beyond succession planning, you also have to consider estate taxes and the amount of planning that goes into that in addition to succession planning. These things are a big deal. They could turn everything you’ve worked so hard for all these years upside down, leaving your heirs to pick up the pieces.
So, how can we avoid losing the farm to creditors? How can we avoid selling the farm to pay for a nursing home? What happens if there is a divorce? Here are a couple of examples of situations I’ve seen where there was not a plan in place, nor a clear-cut decision maker leading the pack in these estate planning conversations.
There once was a grandmother who lived in a senior home. She had grown up on the farm, ran the farm, and now, watched the farm from afar while the next generation took over. Although she wasn’t actually there, she ran the finances while her son and grandson ran the farm. Imagine the lack of clarity in decision-making. Imagine the potential conflicts that could arise out of that dynamic if the person in charge of finances doesn’t know what is going on with the everyday operation of the farm. There is a big disconnect there, and disconnects leave ambiguity. Ambiguity leads to friction, and friction leads to conflict.
Then I had another situation where I was talking with a couple and the husband passed away before they had a set plan in place. The children did not have the skill set to run the farm, so the mother was not only dealing with losing the love of her life, she now had to figure out what to do with the farm. What if she and her husband are the generation that ends this farm? Is that what her husband would have wanted? Again, that ambiguity of options without specific, set plans in place led to friction. The decision of succession sat heavily on top of her grief. These are examples of what can happen if you don’t have clear decision-makers, if you wait too long, and if keep putting it off thinking you’ll figure it out eventually.
Now, let’s talk about logistics. The first thing to figure out is to clearly define your goals. Let’s not think about what the neighbor did or what you read on the internet. Throw that in the garbage. What do you want? This is the true starting point. Once you have a goal set in place of what the best-case scenario would entail, we can work backward to get there.
When you’re considering your goal, try to make it something straightforward. Something like, “I want to make sure my son can continue to farm,” or “I want my family to cash out.” This way, both you and your advisor will know exactly what your end goal is. From there, everything else we talk about is in consideration of how we make that said goal happen. This is up to the decision-makers. We can bring the kids and whoever else in later, but we need to start with just the decision makers clearly defining their goals and aspirations for their family’s future.
While discussing logistics, we’ll also work on capacity. Can we make the goals happen, are they achievable?
“My son is farming with my husband. He’s a good kid and I love his family, but I just don’t think he can do it once we’re gone,” is a sentence I’ve heard multiple times.
I had a woman call me and tell me she didn’t think it would work because she didn’t like the way her son and his family handled the farm. There have been situations where people don’t trust their heirs to keep it going, and they know they would be better off cashing out or hiring help. There have been other situations where the family has all their kids working on the farm and they love it, they work hard, and they will carry on the family legacy without hesitation. Every family sits on that spectrum of capacity, and it’s usually the decision-makers who know the reality of their position.
Here’s the thing: Every generation is going to do things differently. Do you think he can’t take over because he doesn’t do it the way you and your husband do? Or is he truly incapable of doing it well? Personally, I am grateful that my son can do it differently from my husband, just like I am happy that my husband does it differently from his father.
Think about the differences in technology and technique. We can get so much more done nowadays, and do it more efficiently. I hope my son can sit in the house and check crops with drones. I hope he doesn’t have to go out and fix fences because it’s all electronic. In other words, I hope it’s different. I hope he farms differently. Consider whether it is really a capacity issue where they can’t do it, or if they just do it differently than what we consider a “best practice”. If they can’t, we need to be honest in figuring out who will. And if they can, we need to let go of what they are doing differently.
Why Women Are So Important to Generational Farming
Women tend to play a completely different role in farm succession planning from what they normally play in their regular day-to-day. I often hear farmwives tell me they can’t get their husbands to help with succession planning. In fact, it’s hard to sit them down and even talk about it. Nine times out of ten, women are the driving force behind this process. Why is that?
Well, it’s no secret that men and women have very different communication styles. I’m going to give you some very scientific information (not really).
Men and women think differently.
Men have boxes in their heads. Maybe one box is farming, one is food (let’s be honest, we all love to eat!), and perhaps another one is sports. Among all of these boxes is one that women often don’t have—the empty box. In other words, when a man tells you he is not thinking about anything, he’s probably telling the truth. He is literally not thinking about anything at all. Men have all of these separate boxes, and those boxes rarely touch. Instead, they tend to think inside one box at a time.
For example, if I tell my husband, “We need to start thinking about generational farm planning.” He’ll say, “alright,” and be on his way. He’ll then go out into the field to plant, fix a combine, or some other pressing task that’s calling his attention. When he comes back in, I’ll ask him if he’s thought about farm succession. I would put money on the fact that he’ll say, “no, I was farming.” He has one compartmentalized thought at a time, and in this case, farming was the open box.
Women, however, are cut from a different cloth. Women have a superhighway of thoughts. When Eve’s feet set foot on earth, the first superhighway was created. That highway was in her brain. Our thoughts don’t stop. Our brains are moving nonstop at all times. What should I make for a potluck? What are my kids eating? What should my mom be eating? Did my neighbor REALLY say that? Will the kids get along when we pass away? It’s possible that we are thinking about all of these ideas simultaneously.
The thoughts never stop, and it’s a blessing when we know how to leverage them to our advantage. This is why we’ll keep saying things like, “We need to get this planning done.” It’s not that we’re nagging as some may think. It’s because we can’t shut off the thought. We don’t have separate boxes that compartmentalize our thoughts like our husbands do. So, when families have a strong female leader who thinks like this and keeps pushing to get something done, the wheels are less likely to fall off. Without her, those things don’t get done at all. That is when bad things happen.
It’s time to lean into your superhighway. Lean into the fact that you can’t stop thinking about it. Take this as your sign and your time to take action. You have the power, the interest, and the pull to lead your family into the future. Step out of the passenger seat and take the wheel.
The fact that we can’t stop thinking about it is one of two big reasons why women are often the leaders of generational farm planning. The second reason is that we birth the next generation. We’re the caretaker from day one, and we cannot let go of that instinct no matter how old our children get. We have an innate drive to be the family nurturers. We are bonded to our children from birth and oftentimes the parent that spends the most time taking care of them. We have God-given intuition that helps us to nurture them no matter their age. Part of taking care of our family includes building harmony between family members, which suits our intuition and nurturing instinct.
Another communication issue to think about during this process is that women tend to communicate in the form of questions. We want people to get along, and this typically serves us well. We want to bring people together and create a consensus. So, we ask questions. Men, however, tend to speak in statements. For example, if you have two guys at a restaurant and one gets up to go get a beer, the other may simply say, “get me a beer, too.” Then, the first guy will go get the beers and bring them back to the table. It’s perfectly fine with them, that’s how they communicate with each other.
Let’s flip the script. If it’s my husband and I sitting at the kitchen table and he says, “get me a fork,” I’m immediately irritated. However, if he says, “Since you’re up, would you please get me a fork?” then it is completely different. Demands don’t go over very well with the ladies, and in turn, we don’t make demands of others (most of the time).
This can be problematic. When we approach a situation with the angle of asking a question, men tend to think we aren’t sure. If you say, “Don’t you think we should meet with a financial advisor to talk about farm succession planning?” a man may think, “Well, she’s just thinking about it. She’s not sure, and I have a different box to go to. I’m going to think about farming and not this because she’s really not sure.” However, if you turn it into a statement, it will garner a completely different response.
For example, “I’ve made an appointment with a financial advisor that specializes in farm succession planning, and you need to go with me Tuesday at 2:00 PM.” His receipt of that exchange will be completely different. He now knows that he needs to go with you Tuesday at 2:00 PM because it’s already been decided. He knows you’re confident and you know what you want. Women are often confident and know what they want, but don’t necessarily communicate it as such. Adapting how you communicate by understanding the differences between these thinking and communication styles can make a big difference. So, while females don’t currently find themselves as chief decision-makers on a farm, they need to step up more and more as generations continue. Effective communication is a critical key to success.
In summary, because of the differences in communication and a women’s drive to keep family harmony, we are often the driving force to get the succession planning process started. Without us, who knows what the future holds for our family? It’s time to rise up and ensure that we are setting our pack up for success.
How Succession Planning Can Help Your Avoid Family Conflict
It’s often a challenge to wrap our minds around what will happen to our properties, our assets, and our children once our time is up. However, the lack of planning leaves our loved ones more vulnerable to hardship than if we were to just take a deep breath and dive into it. Discussing and finalizing a succession plan doesn’t have to be hard when done correctly. It’s something that brings clarity and peace of mind to the family in both the short and long term.
Farm succession planning is the process of planning how your farm will be passed on to the next generation. Succession planning is crucial, but unfortunately, many wait to plan for what’s to come until it's too late. This planning presents its own set of challenges and raises so many questions. What's going to happen when the kids inherit the land? Are they going to get along? Is the farm going to have enough money to keep going? Are the kids going to have to sell the farm in order to stay financially stable? What is the farm legacy going to look like? Are we living and leaving the life that we want?
Farm families face the challenge not only of maintaining the financial strength of their operation but also of passing the farm on without sabotaging family relationships. It is essential to implement strategies and systems to maintain wealth and pass the farm on while keeping family harmony.
It takes true grit and tenacity to run a successful farm. It takes compromise, compassion, grace, and communication to have a close family. While running both, it can often be difficult to prioritize between a successful family and a successful farm, as those lines can get blurry. This must be considered when planning for the succession of the farm. Without a solid plan in place, both the family and the farm will be demolished. On the other side of the coin sits intentional and thoughtful planning. When we plan the future of our own accord, we do not have to prioritize family over farm or farm over family, nor do we have to compromise the financial success of the farm for our love of family.
Farm succession planning is significantly different from other types of wealth transfer planning.
There are often significant assets, however, they are not liquid. To liquidate them will destroy the farm.
One heir or child may have time spent working on the farm. We often refer to this as sweat equity.
In the past when completing farm succession planning, instead of being viewed as businesses, farms were seen more as a family asset. With the increase in values and many other changes in society, this is no longer true. Farms are indeed businesses.
There is often a deep love for the farm, which in many cases has been in the family for multiple generations. There is a tie to the way of life and the land, which is not seen like other traditional businesses.
Succession planning is crucial and the sooner you start, the more choices there are. Another reason to start earlier rather than later is that it is human nature to have negative emotions during times of uncertainty, so there is often conflict when there is no communicated plan in place. Additionally, many people connect love to giving, so if there is a perception of being left out it can create significant animosity. These are reasons why taking clear and decisive action to put a plan in place as soon as possible not only protects your farm from the risk of not having a plan in place but also protects your family from unneeded conflict.
I’ve seen situations where the current generation is not ready to stop farming so they don't feel the need to put a plan in place. In these cases, there is a perception or fear that the plan will be implemented immediately, when in fact most often the plan is intended to be many years down the road. In reality, they need to have a plan in place in case the unexpected happens. This type of hesitation can cause discomfort within the family. The fact is, if there's no plan in place and somebody unexpectedly passes away or can no longer work the farm, the consequences are devastating to both the farm and the family. Therefore a good succession plan is not necessarily the beginning of the end, but rather a plan for transition.
We all play different roles within the family and within the farm. There might be a long history of expectations and responsibilities with the family, but perhaps the farm may have people playing newer, less certain roles. Families may hesitate to put plans in place because they're not confident in the roles that everybody will play. We often find that things can change over time and this is true with both the family, the farm, and the regulations that govern succession planning. However, it’s important to take action based on what you know today. Don’t wait until you are certain of the direction of the farm. Do it now, and if things change, your plan can change. Put something in place that can grow and be modified as your family and the farm change. As roles change, so can the plan.
In addition to potential questions about roles, there may be some hidden animosity between family members that may not be a big deal in itself but can potentially trigger something bigger. For example, these can be in the form of a joke at the wrong time, or a family member that is still mad he didn't get the shoes he wanted in the second grade and takes that resentment out on his brother. Perhaps we cannot undo this unrest through the planning of the farm, or through anything at all for that matter. But, if we do nothing about the farm, that tension is guaranteed to build until it explodes, potentially ruining everything the family has spent generations building and working for. Therefore, action needs to be taken by the people I call the decision makers; the people currently running the brand, the farm, and the assets.
There will be conflict among family members if there is uncertainty about what the future holds. It’s easy to fall into the mental trap that the plan itself may cause conflict. The reality is that at the end of the day, it is actually the lack of planning that causes the most conflict. The lack of a plan is the elephant in the room. Everyone knows it's there and that there needs to be one, but it is being avoided. Take a moment to think about what will happen if you continue to avoid taking action.
There could be continued conflict amongst the family, whether spoken or unspoken. There could be a significant risk to the financial stability of the operation you’ve worked so hard to build. The property could be sold and your family’s generational farm will be in the hands of another. Worse of all, your children could become estranged. Don’t wait. There is zero value in putting this off. Now is the time, and I’m going to walk you through just how to do it.
Once you make your plan, there will come a time to communicate this plan to your heirs. Once you have the conversation, you will realize that the conversation is truly not as hard as you might think. The time is now to take action. A plan is needed to secure your family’s future and the future of the farm. You know this is true and that's why you're reading this book. In the long run, proper succession planning ignites a sense of relief, confidence, and understanding throughout the family.
So much is at stake. You've been blessed with a beautiful family, and a beautiful farm, and no one is promised another day. It's worth it to start the process now.
Why You Should Tell Your Kids About Your Farm Succession Plan
It might be out of our comfort zone to take charge of such a monumental element of our family’s financial future.
Women might have not traditionally made the big decisions on the farm, so they may not be used to, nor comfortable, grabbing something by the horns when it comes to making other decisions. But when it comes to succession planning, it’s more than the money. It’s our family’s well-being. In a mother’s heart and mind, her job is to ensure family harmony. We need to be the ones that do it, otherwise, it might not get done.
Once you realize you must take action in your farm succession planning efforts, there are a couple of things to be mindful of as you navigate the conversations and collaborations of farm succession planning.
Don’t Let Your Heirs Control Your Planning Process
The biggest mistake I see people make is bringing all of the kids into the decision-making process. Unfortunately, it just doesn’t work that way. Do not involve your heirs along the way. Make the decision and then let them know.
You can’t expect the whole family to sit in a financial advisor’s office or gather around the kitchen table and come to a consensus together. As the parents, you see the complete picture.
Each child, no matter how great they are, is going to have more self-interest intertwined in their ideas and responses. Therefore, they may not be capable of looking at it from the viewpoints of their siblings.
The other thing you can’t be sure of is whether the kids will be honest about their wishes if asked. Oftentimes our adult children make comments like “It is your money you should spend it,” “you raised us, kids, well and do not owe us anything,” and “I do not want your money/farm.”
It is human nature to say things like this.
Your children love you and don’t want to seem greedy or entitled. But the fact of the matter is that once you pass away they will want what is rightly theirs.
If you have any doubts about whether leaving the kids out of the decision-making process is the right choice, think about it this way — you built the farm, and have sustained it to this point by making the right decisions. You can also make the right decisions about succession. Use your success up to this point as proof to yourself that you will continue to make the right decisions.
You don’t need to let the kids know about the decisions until the decisions have been made. You’ll go through the process, write everything up, and only then should you sit the kids down to talk to them about the plan.
From start to finish, you’re looking at a typical timeframe of about six months to get a secure plan in place. From working with the financial advisor, then the attorney, it takes time to dial it in. After about a year, you will be ready for the conversation with your heirs. And, you don’t have to do this alone. Most good advisors are willing to sit down for that conversation to help you.
Take this typical scenario for example –
I might have a family reach out to me because they have decided it was time to take action and they have lots of questions. They have three children – two of them stayed home and lived on the farm while the third son moved away. At the time that they call me, the oldest son has recently come home to the farm after living far away for a while.
At this point, the parents aren’t sure whether having their son take over the farm is going to work out, but they feel like they need to let him try. Things are uncertain at this point, and they feel a ton of pressure because they didn’t want to hurt one of their kids as they figured out the future of their farm. I tell them we should get together and discuss this.
So, after the Christmas holiday, we talk again.
Mom is in tears, saying, “I don’t know what to do. We didn’t raise our kids to fight and be so rude to each other, but that is exactly what happened over Christmas. What I don’t understand is that it seemed to come out of nowhere. They just all of a sudden were mad at each other about things like pictures in the basement, old school work, and other things like that. Little things. Things that shouldn’t mean so much in the big picture.”
I tell them I didn’t think this was about the things in the basement, but rather about the farm. They are uncertain about the farm’s future, tensions are growing over that, and they are letting it out over other things. The parents agreed that the fighting had to be over something bigger.
They cannot bear the idea of how much the kids would fight over the farm if they were fighting this much over seemingly trivial things. It is during this moment that Mom and Dad realize they not only need to act on their succession plan but that they need to do it now.
So, then we get to work with their team and put a plan in place.
They share the plan with the kids once it is done. This settles much of that angst. They will come to terms with it, and they will finally agree that this was the fairest plan possible.
This scenario leads to another lesson.
Don’t Wait To Tell Them
Tell the kids as soon as you can once the plan is in place.
You want them to have time to process this and sort it out in their heads.
There is absolutely no benefit to keeping things secret once you have the plan set up. Wouldn’t it be better to set aside any potential disagreements early on rather than catching your heirs off guard once you are gone? They will be emotional enough as it is, so let’s minimize the surprises.
If you are ready to set a plan in place for the future of your family and the future of your farm, please don’t hesitate to reach out to me at heather@heathervenenga.net.
At the least, I’m happy to be an informal sounding board as you begin the farm succession planning process.
Farm Succession Planning: Dealing With the Hard Fact That Equal Division Might Destroy the Farm
Farm families need real-life solutions when it comes to passing the farm to the next generation. When I work with a family once they get clear on their goals I can most often provide numerous solutions. The hard fact is that if our goal is to keep the farm operating and pass it on to the next generation to continue to have it a profitable operating farm we most often cannot split it into pieces.
These facts might hold true for your farm:
There are years when two families can be supported on the farm (Mom and Dad and the heir (s) that have come home to farm) but there are years when it is tight.
If we want to continue to exist we must continue to grow and we cannot bleed revenue to another source outside the farm if we want to stay in business.
One child or more might have given up the traditional job with a 401k or other life building/retirement sustaining perks to farm and keep the operation going.
Your generation worked hard to eliminate debt on all or most of the land and to put the burden of a loan back on the current land would be a step backwards in risk, independent from the bank and overall financial stability.
You raised all of your children well and tried to instill good moral and financial values. Some received college degrees and left the nest. They are making their mark on the world in great ways and it is not on the farm. Some might have been raised well and they are struggling. You might be one of the lucky ones that have an offspring who has the commitment to the farm that you have and the generation before you had.
You love all of your children the same no matter what the path and you want the farm to continue and you want your children to feel loved.
We can’t always divide the assets equally and maintain a functional farm. We also don’t necessarily need to. What is fair and what is equal do not always align. Here’s what I mean.
Let’s look at this hypothetical example –
Mom and Dad own a farm, and they’re nearing retirement age. This does not mean they are ready to retire.
Their son, Brad, lives on the farm with his family. Mom and Dad are thrilled to have him there. Over the past several years, Brad has not only worked the farm as he always has, but is now taking on more and more responsibility. He’s been doing a great job and Dad is gradually lightening his own workload and responsibilities while continuing to mentor Brad where needed.
Because of this, Mom can finally get Dad to take time off so they can spend more time together going on vacations and enjoying life. Before Brad stepped up to the plate, they had to schedule carefully since they ran the farm full-time. On top of that, Brad now has children. His taking on more responsibility at the farm means that Mom and Dad are able to spend more quality time enjoying their grandkids.
It’s obvious in this decision that Mom and Dad know Brad is the key to keeping the farm going. They know he not only wants the farm, but he has earned it. They know he will take great care of it. Plus, this way he can pass it to his kids, which would make a fifth generation to own and run this farm. They are proud of the family legacy and want to make sure it stays in good hands.
Now, let’s talk about Holly, their daughter. Mom and Dad love and respect her dearly, just as much as Brad. She is an incredible teacher and a great daughter, but she’s married to a man Mom and Dad do not have a great deal of trust in. He doesn’t work much, and they know he would be no help running the family farm. Sure, he’d probably be interested in the money, but not the work required to run the farm.
Then, there was Greg, their second son. Mom and Dad love and respect him dearly, just as much as Brad and Holly. Greg works in IT, which is a great job that he truly enjoys. Neither Greg nor Holly have much interest in living on or running the farm; They are happy with the lives they already have and enjoy what they do.
Aside from the farm, Mom and Dad have other assets.
They have about $100K in one retirement account from a job Mom had years ago. Mom and Dad have been hands-off with this account and the money has continued to grow. They also have about $100K in a Certificate of Deposit (CD) account, as well as another $200K sitting in the bank. So, they have around $400K saved in total in addition to the value of the farm.
Life is great! In fact, things have been so great that Mom and Dad have been a bit lackadaisical about their succession plan because, on the surface, it seems like there won’t be any issues. They have their assets, the farm is going great. The kids all get along well and are happy with the way things are.
Though Mom and Dad haven’t thought much about it up until now, they are finally starting to realize that in order to make sure the kids keep getting along and don’t have a reason for conflict, it’s time to iron out the details and formalize the plan. Ultimately, they know they want Brad to keep the farm. They also know they have no way to make things equal for Holly and Greg if this happens, but they want to ensure whatever they do does not leave one or more children feeling left out or not loved.
The challenge here is that there is no way to split this farm three ways.
Mom and Dad can split the money to where Greg and Holly get $200K each, but then Brad comes out too far ahead financially by getting the farm. On the other hand, if they find a way to split the money evenly, it’s not fair to Brad because he has more sweat equity in the farm. And splitting the farm three ways will sink it and destroy it over the next several years and this is not inline with the goals of the decision makers- Mom and Dad. The thought of ending the farm over distribution between heirs is sickening. Also, unlike Holly and Greg, Brad doesn’t have a traditional retirement plan, like a 401(k), since his lifetime job has been working the farm. These are all considerations in how they pass the farm and the assets down.
So, what can we do in a situation like this?
A bucket of funds needs to be created to be passed to the non-farming children when the decision makers pass away and pass the farm to the heir who has been farming. The sooner a family takes action to make this happen the more leverage that can occur based on age and time. It is much easier in our 50’s but not impossible in our 70’s. When steps can be taken to make this happen it feels like magic. A good financial advisor can help a family sort through solutions and see if this is a possibility for your specific situation.
Know that this isn’t the only solution, though, so if you don’t think it will work for your situation, we’ll discuss other ideas and get creative where needed. No matter what you do or how you formulate your succession plan, the key to everything is to take decisive action based on good advice.
If you need help getting started or have questions of what the best option is for your family, please reach out to me at 605-878-0344 or email me at heather@americanharvestfinancial.com. I am here to get you on the right track and am always happy to be an informal sounding board as you consider what the future holds for your family.
Protect Your Family and the Farm from the Grave
There is not one person on this earth who would voluntarily opt-in to leave their affairs a mess for their family to sort out. We all want our family to feel secure and valued, and we want the future of our family businesses to live on according to what we think is best. Getting the correct legal documents in place is the only way to pass your assets and keep your farm going in a way that you want it to.
The documents must be legally written up and can be very complicated. The only way you will get the proper documents in place is to seek legal advice from a qualified attorney. This article in no way will replace the qualified legal advice that you need, nor will an internet search. But I will provide you with some basic information to consider.
Wills and trusts are familiar words to many, but not many people know the true difference between the two. Sure, they both are tools that help in succession planning, but which one is best for your family? Do you need both, or will one suffice? Both a will and a trust can be used to decide the people who will receive your assets and your estate upon your passing, and they also define the person who will settle your affairs on your behalf. In essence, they both allow you to plan what’s next for your family once you step away from this life. However, there are distinct differences that are important to keep in mind. Let’s break these two documents down a bit further.
What is a will?
A will is a legal document that says how you want your affairs handled and your assets distributed after you pass away.
What is a trust?
A trust, also a legal document, is a fiduciary arrangement in which the owner of the assets assigns a trustee to take action based on their instructions after the owner passes away. A trust can have lots of different instructions based on what the owner wants to have happen. The assets can be held within the trust and managed by the assigned trustee.
Most farm families use a trust because passing a family farm on is a complicated process with lots of moving parts. There are two primary types of trusts that you should consider: revocable and irrevocable. In short, revocable can be changed while irrevocable cannot. At this time revocable trusts do not protect from long-term care and creditors while irrevocable might in some cases.
Since farms are active, things can frequently change. It’s oftentimes counterproductive to lock our families into the legal document of an irrevocable trust. Some examples of things that might change related to your farm or planning process are you might want to use your farm as an asset to obtain financing to grow your operation or you might change your mind on who you want to have run the farm or or take over the property after you pass. This is why most farm owners with an operating farm choose a revocable trust over an irrevocable one. There are, however, scenarios where an irrevocable trust would be your best bet.
One exception to this is that irrevocable trusts can be helpful in a widow’s case. It helps the widow to not have to worry about the pressure of figuring out how to manage the assets once she’s left with the farm. It’s already been decided. In this case, she doesn’t have to think about changing her mind or being coerced in some way. What’s done is done.
There is also a third type of trust that’s rare, but worth mentioning — a special needs trust. This type of trust is particularly helpful in the scenario that one of the children or grandchildren has a disability. You want to leave something for them, but maybe you aren’t sure if they can manage the money due to a disability or a special need of some kind. These trusts can help in that type of situation.
There are many other types of trusts that can help make sure your plan is put in place in a way that you want it to be and is legally carried out. This summary gives you some very basic information to work from as you seek legal advice when you are ready.
Sometimes families do not want to use a will or a trust at all. They decided that they want to pass the farm on as a corporation with shares. There once was a family who had large production levels at their Christmas tree farm. They operated it not only as a farm, but as an annual event. People from all over town would visit this Christmas tree farm to pick their tree for the year, go on a sleigh ride, and drink hot chocolate by the fire as they were greeted by the man in red. It had become such a big part of their town, that the parents in charge wanted to pass their farm down as an LLC or a corporation.
You see, when you use an LLC or corporation, you’re creating business partners. In other words, your spouse and children are now considered business partners in more than a material way, but now also in a legal sense. One way this can be extremely helpful is to think about how many business partnerships find themselves in turmoil. Unfortunately, it’s quite common. Think about how this will affect relationships, as the partners will now be your kids, their spouses, etc. Also, think about how this will affect the farm. When you cross from the line of family-friendly affairs to stringent business law, things could become cleaner, but also a bit heavier.
A significant amount of farms that are passed on as a business entity end up in court. Let’s look at some case studies that explore this avenue further. In 2014 there was a case that went into litigation with two brothers and two sisters. The brothers actively farmed and were given 80 percent of the estate, whereas the sisters did not farm and were only given 20 percent of the estate. The brothers could out-vote the sisters at all times. So, whenever necessary, their votes overruled the sisters’ votes.
They followed every rule they needed to as a corporation with proper documentation, meeting notes, and everything else required. Later, a situation came up where the boys paid themselves $400,000 in commodities. They had a particularly lucrative year and were able to pay themselves this large sum of money. This was something they had seen their dad do, and it seemed normal and within the rules. However, the sisters didn’t think this was right; they believed they should have a piece of the pie and they legalled up and sued.
Regardless of who is right or wrong here, this is likely the last scenario you want your children to find themselves in. The last thing you’d want is a situation where siblings are pitted against each other, especially to the point that it reaches litigation. In this case, the boys won the case because they had the legal authority to do what they did. While they didn’t do anything wrong, a situation such as that can cause a rift between the family. And, isn’t that the whole reason this book is in your hands? We clearly want to avoid litigation when it comes to family, and in order to do that, we need to fully understand all our options to know the best way forward.
That said, farms should be an LLC or a corporation. As I’ve mentioned before, farms are big businesses and need to be treated as such. There are a lot of legalities in this world, and if you are an LLC or corporation, it helps protect you from litigation from outside sources. Take the example of a husband and his cousin who work the farm together. The cousin gets kicked by a bull and finds himself with a serious injury chances are, the cousin wouldn’t even consider the idea of suing the farm. His insurance company, however, will absolutely look at suing the farm. It’s completely out of his hands as to what they decide to do.
Another example for you to ponder is a story about a dad and his two sons. They have three different corporations — one for the combine, one for trucking, and one for the homestead and cattle. They hired truck drivers and one of those drivers made a horrible decision. He drank a lot of alcohol on his lunch break, drove his semi, and ended up killing someone after running a stop sign. In a case like this, only the trucking company can be sued. The combine and the homestead are safe from litigation. An already horrible situation could have been disastrous for the entire farm if the corporations were not split up. If, in fact, all three were under the same entity, they could have been sued for much more than they were.
You need to seek advice from your attorney and CPA to determine what type of legal entity is best for your business. I cannot stress enough that these are complicated important decisions specific to your situation and you will not find the answers online you must seek professional advice.
An LLC or corporation will be covered in a trust, and regardless of how you choose to format your succession plan, the important thing is that you start planning now. This is a big decision, and another of many tough decisions you’ll need to make through the estate planning process. The more decisions you can make now, the more harmony your family will have in the long run.
If you need help getting started or have questions of what the best option is for your family, please reach out to me at 605-878-0344 or email me at heather@americanharvestfinancial.com. I am here to get you on the right track and am always happy to be an informal sounding board as you consider what the future holds for your family.
Building Your Estate Management Dream Team
Estate management requires a team of people, where each team member plays a different part in the process. While your goals define the process, your team puts the pieces together. Think of this team as a three legged tripod — each leg must be solid and supportive in order to precisely execute your plan.
Certified Public Accountant, or a CPA
The first leg that holds up the tripod is a good CPA. This needs to be someone who sees the long term picture of where you are going long term, not just a year at a time. Beyond harnessing the vision, your CPA also needs a backing of their own. You may be wondering what I mean by this, let’s look at an example.
A farm family I know had a long time accountant who decided to retire right before tax season. This CPA was paper heavy and didn’t do much on the computer, so the records were not available electronically. This created a mess because of all of the backtracking my client had to do in order to get the needed information from prior years.
If you think about it, your accountant is collecting various documents each year to properly file your taxes. Take that and multiply it by the number of years you’re working with your CPA, and you’ve got a nice stack of paperwork. If that paperwork isn’t filed digitally, the process of pivoting to a new CPA in the case your own isn’t available becomes daunting. Moral of the story — Make sure your CPA has someone who can step into the role in case they cannot, as well as a seamless process to share all your tax documents. This is a good standard for all members of your team.
Attorney
The second leg of the tripod is an attorney — and not just any attorney. This needs to be someone who clearly understands farm succession because it is different than regular succession and estate planning. As great as so many of these small town attorneys are, they have so many varied tasks to perform that they may not have deep knowledge of something like succession planning for a farm. They may be bailing someone out of jail in the morning for driving under the influence, in the afternoon they are working on a divorce case, and then at night they may be looking at your estate planning.
When they are so multi-faceted, it is difficult for them to fully understand everything they need to help you put together the best plan. It is just too complicated with changes to the laws, and all of the details that need to be considered, so it is critical to have someone who specializes in estate planning, particularly for farms.
Financial Advisor
The third pillar of this tripod is a financial advisor you can trust. In this process, your financial advisor is like the Quarterback. They are the ones to bring everyone together to make sure the right “plays” are made. By calling the plays, financial advisors can ensure that each person is doing things the way they need to be done in order to secure a strong future for your family.
For example, an attorney writes wills and trusts, while financial advisors work with long term care planning. So the attorney asks how you are going to handle long term care planning, and if you do not know, the attorney is limited in the options they can present because this is not an attorney’s area of expertise. However, the financial advisor will know of many options. So, you’ll want to pre-plan with a financial advisor before organizing with an attorney.
The financial advisor will work with you beforehand and help you gather information the attorney needs to know for the will and trust, such as the long term care I mentioned before. This way, you will be prepared with the answers.
Sometimes people come to me and tell me they have already worked with an attorney. On one hand, that’s great to hear, as it means they have taken initiative to get something done. However, I have seen gaps when people meet with an attorney but not a financial advisor. As the quarterback, the financial advisor can give you some basic information and help you sort through the process in order to make sure the team is communicating and working together. They can make sure all aspects are covered before the attorney and CPA do their respective parts.
If you have talked to one or two members of this team, but not all three, be sure you loop back to them in order to make sure all aspects are covered before finalizing your plan.
While we’re on the subject, let’s discuss wills and trusts for a moment. I want to educate you with a less technical, non-attorney perspective with what I know. First, wills and trusts are only a small part of the process. While they are important, there are so many other factors. It is critical to have the planning done before you complete the will and trust. A will goes through probate, and may be really simple, or quite complicated. Where I get calls are on the more complicated situations. I had a situation awhile back that involved three kids and a stepmother.
The kids all played different roles on the farm and got along great while running a good operation with no issues whatsoever. But once the stepmother became involved after the father passed away, things changed. For the entire five years since he passed away, they have been in probate and having problems. The three kids are in $100,000 of debt over this, and I can safely assume the stepmother is as well. They are still trying to work out what they thought the father wanted. When they walked into the courtroom, the judge told them to stop farming while things are sorted out. Obviously they can’t simply stop farming, as they have to keep it running. Sadly, the last I knew, they were still in probate trying to sort things out, so this is certainly something you want to avoid.
A will might be fine for a relatively simple situation. When the finances are simple, such as a house, investments, and bank accounts, a will tends to work fine for establishing who gets what. However, if you have something complicated like a farm, this just isn’t enough. You need more detail, something to cover IF this, THEN that. These if/then situations are critical to map out.
The trust explains these situations. It maps out exactly what you want, such as, “I’d like my son to farm it, but if he’s not interested, I want my neighbors to be able to rent it.” You can use that trust to spell out your wishes in any scenario. Because of the complexity required and the flexibility provided, most farms I work with use a trust.
Once you have worked with an experienced Financial Advisors who specialize in farms and layed out the details of what you want to see happened and made sure the protection pieces are in place. Then it is time to seek legal advice from an attorney. Every situation is very specific and you will not find the answer to your plan from your neighbors or even in a book. You must seek qualified advice specific to your situation.
If you need help getting started please reach out to me at 605-878-0344 or email me at heather@americanharvestfinancial.com. I am here to get you on the right track.
What is Generational Farm Planning?
You may have noticed that phrases such as generational farm planning, farm succession planning, and estate management planning are all interchangeable. That’s because they essentially mean the same thing. No matter what you call it, it all comes down to one thing — planning ahead for your family’s well-being. But, if everyone knew this was the right thing to do, why do most people drag their feet on it?
There is a huge misconception that a well-crafted estate management plan is just for the wealthy. This is a big misconception that holds tons of families back from planning ahead. It’s also important to note that estate planning is different from a will, although a will may be included in an estate plan.
An estate plan from a good team will ensure that your wishes are carried out – who leads the farm once you’re gone, who takes care of the land and the animals, who has rights to the property, etc.
Generational farm planning, or estate planning will ensure that everything is legally binding and that your cubs aren’t left fighting once you are gone. It will ensure that taxes are covered, thus keeping the government from showing up and making decisions for you. On top of that, this will help make sure that the heirs are going to get along once you pass away. A good estate plan is for absolutely everyone.
According to the US Department of Agriculture's National Agricultural Statistics Services only 23% of farms have a real estate management plan. This is why we’re having fire sales. What do I mean when I say fire sales? I have a story to explain that one, and this may sound like someone you know because this is a common thing that happens.
I became aware of the situation at a stockyard cattle auction one day. A family with 3 kids was auctioning off the farm. One of the sons worked the farm his whole life. The daughter worked for a daycare, and the other son had a job with the state. No succession planning had been done for their farm. Mom passed away about five years before this, and Dad just three years following her. Everything went on for a while with the oldest son running the farm. However, last year, the brother who worked for the state retired and decided he wanted his share of the farm.
In a situation such as this where there is no plan in place, the default by law is that all assets are split evenly between the children. This is the case for money, property, and any other assets. When challenged, the courts do not consider family relationships, only what they consider an equitable share. Once the older brother decided he wanted his share, it went to probate court. The court predictably ruled that it had to be split three ways. Unfortunately, the only way to do this was to sell, hence the reason they were at auction on this day.
The parents had not done any planning, so the kids (who were now adults) were fighting over the assets and treating each other horribly. The daughter was so upset she could barely speak, and the son that ran the farm was understandably in a foul mood, as he was now losing not only his livelihood but on top of that he was losing the legacy he would have passed down to his son. He was devastated and commented that their dad would hate to see this happening.
We all felt that emotion to one extent or another. It was so hard to see this happen to what was once such a good family. A good plan can prevent this type of situation, so the goal is always to have your plan in place before something like this happens.
No matter your financial status, the size of your bank account, or your age, estate planning preserves the love of your family, preserves the legacy that you have worked so hard to build, and it’s way easier to do than you would have thought.
So, how do you do it? I offer several educational workshops in person and virtually throughout the year. Contact my team and we will get you signed up for a time that is convenient for you. Please don’t wait. It’s important for your future and your family’s future to plan ahead when it comes to generational farming.