Is it time to consider the next generation?
When Webster County, Iowa farmer Craig Peterson suffered a health scare four years ago, he and his son Kent started talking. Kent had grown up on the 150-year-old family farm and studied ag finance at Iowa State University—but he had married, moved away, and was a successful farm loan manager at a bank in Eastern Iowa.
After several months of “what-if” discussions, and more months of implementing the plan the family worked out, Craig Peterson and his wife Barbara moved to the nearby town, while Kent and his family moved to the family farm.
The Petersons had already started down the route of farm succession, and good thing too—in 2020, Craig Peterson unexpectedly died from his condition.
Getting the message
You live in the country, work hard farming every day, and if you’re lucky, grow old. If you’re really lucky, you have a family, with children who grow up on the farm and help every step of the way, learning to love the life as you do.
Then one day, a message arrives. Maybe it’s an ominous meeting with your doctor, or news that the farmer down the road met with misfortune. The questions must be asked:
What if something happened to me?
Would my family be ready to take over?
How would that happen, anyway?
The saying about alligators and draining a swamp speaks to fighting the battle every day but forgetting why you are there. It is natural to put off until tomorrow something that is hard to imagine and may never come.
Nevertheless, it will come. The only thing we can do is plan for it.
You plan your crops, why not this?
“The biggest mistake I see is putting off the planning process,” says Jeff Troendle, president of Hertz Farm Management (HFM), a midwestern management and real estate company with 15 offices in five states.
“They procrastinate, and don’t want to think about mortality,” he advises.
Simply put, it is time to start talking with family. Buckle up, though—it is bound to be emotional.
“Communication is key,” writes John Taets, a Regional Bank President for Northwest Bank, which specializes in ag banking services. “Communication with your family and business partners before, during, and after the transfer or sale process is paramount during farm succession planning.”
Experts like Taets advise that it is important to sit down with family members who would be impacted, all of them. Typically this involves your child or children, but if you already operate as a partnership with someone, they should be part of the conversation, too.
Practical questions should start the discussion: If you die suddenly, for example, who will take over? Will they live in the farmhouse? How will the work get done in the near term? And so on.
It is important to gain agreement from children (presuming they are grown adults): After the plan is executed, who will do the work? Will there be compensation for other siblings not directly involved? And what if the plan is to sell the farm outright, how will taxes, costs and profits, if any, be allocated?
It can be complicated, and this is just the talking phase.
Laws change, people die, the land remains.
How to move ahead
Farm Bureau Financial Services, headquartered in Des Moines, Iowa has been involved in farm succession planning for decades, and has seen the good and the bad. They advise there is no “best” way to transfer a farm or ranch because it varies from family to family.
A good succession plan should factor in what you want, especially if you plan someday on retiring from farming, they write. “As you map out your succession plan goals, also consider what’s important to you. If your home has significant meaning to you and your family, you may want to keep it in the family.”
One of the thorniest issues involves multiple heirs. The financial services company recommends asking yourself the following questions:
- If I have multiple heirs, what is the split between those who are farmers/ranchers and non-farmers or ranchers?
- If there are multiple heirs who want to farm the land, would they be able to work well together?
- How might increasing the number of heirs affect my farm succession plan?
Clearly, clarity will be difficult to achieve without talking to each one involved—to gauge future interest, likely involvement, and their own career or financial expectations. Sandbagging, that is, having almost everything planned and only then presenting to a likely holdout, will likely create ill well—better to bring everyone together early.
After starting, then what?
Northwest Bank’s Taets says there are three “partners” to reach out to:
- Your attorney, to advise of legal implications
- Your accountant, to help with cash flow, debt, and tax implications
- Your bank or other finance entity you do routine business with
“Involving these business partners is especially important if the family member receiving the farm has not been involved in the day-to-day operations and will need help managing the farm,” he states.
It is important as plans are drawn to repeatedly ask the above partners, “…and what is the implication of this choice?” If they can’t answer competently, keep talking.
“Another big mistake is not getting their plan in writing and sharing it with their heirs,” says HFM’s Troendle. “When it isn’t in writing, everyone has selective memory and can only remember the things that favor them as an individual.”
Perfect, the enemy of ‘good enough’
“Not starting because you are afraid of doing it wrong causes way more problems than coming up with a slightly imperfect plan,” Troendle says.
The key is to leave some flexibility in your plan to account for some of your assumptions being wrong, or if events change what makes sense. For example, a farmer leaving 200 acres to one heir makes more sense than dividing that 200 acres among four or five children—you lose the economies of scale trying to successfully farm 40 to 50 acres, in most cases.
Troendle also points out that trusts are a great tool in some situations, but trying to “rule from the grave” is often inflexible, and may require going to court to address even simple situations.
Many farmers are wealthy on paper because of the high value of farmland, but annual cash flow can be more limited. So rather than sell off acres in anticipation of a “significant event” like death or retirement, some look at other options like bringing interested heirs into the job as hired hands—essentially employees—as a trial run (more on their part than yours).
Seeing firsthand how the new, younger farmer handles the job can give insight into how to structure your succession plan.
And if you’re ready now?
According to the U.S. Department of Agriculture, nearly one third of U.S. farm and ranch operators in 2012 were over the age of 65. By any standard, farming is an “elderly” profession.
At one time, farming was seen as a “die on the job” occupation, with men tending to pass on first, leaving their widows as principal operators. While many have stepped up to assume the work themselves (often quite successfully), a large proportion took the next-best route.
They leased their acres. This is often the result of not having a workable succession plan, but—depending on circumstances—it can sometimes be the best choice for someone inheriting farmland.
Leasing can also benefit younger farmers trying to get into the business, without the horrendous land investment. Farmer Craig Peterson, mentioned above, wrote a just-in-case letter to his wife—unopened until his passing—that if anything should go wrong during his first health scare, she should move to town and lease their land to a young farmer.
Without question, he was thinking of bringing a younger generation to the farm. In the end, he helped his son.
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