Farm transition and succession – What is involved?
Most farms recognize the importance of a farm business transition and succession plan to pass the farm on to the next generations, but they don’t understand how to formulate a good plan.
As a Michigan State University Extension dairy farm business management educator, I have observed that it is nearly unanimous among all farms that the most important goal of the producer is to pass along the farm business to the next generation. Despite this intense desire, as pointed out in a previous article most farms fail to make adequate plans to achieve this important goal. Formulating a viable farm transition and succession plan can be a daunting task as it involves a wide variety of topics and requires a great deal of frank and honest communication among family members. Like most such tasks the hardest part is getting started. To assist farmers in formulating a viable farm transition and succession plan Michigan State University Extension offers workshops and direct one-on-one assistance. You can contact your local Michigan State University Extension office to get more information.
A farm transition and succession plan is a continuous process that involves transferring knowledge, skills, labor, management, control and ownership from one generation to the next. Even though it involves estate planning, it goes far beyond the mere transfer of assets to your heirs and includes all aspects of the farm business from the legal and tax angles to the day-to-day management and operation of the farm business. At a minimum it involves decisions regarding asset ownership, choice of business entity, estate planning, retirement planning, tax planning, and transfer of labor and management. It is important to realize that formulating a viable transition and succession plan is not a one-time affair to be completed, encased in glass and labeled, “Open only in case of the owner’s death.” You should begin formulating your farm business transition and succession plan at least 5-10 years before your anticipated retirement. In fact, transition and succession planning is a process that should begin the day you take control of the farm business and continue throughout your life. Farm business transition and succession is a continuous and dynamic process. As you move through life your situation, family needs and business will constantly change and require you to make changes in your transition and succession plan to keep it viable and relevant.
As you begin the task of developing a viable farm business transition and succession plan it is important to consider the most basic elements of a successful family farm business. This involves three entities: individuals, the family and the business. In order to succeed all family farms must successfully blend and accommodate the values and goals of each individual with the shared values and goals of the family. The business then uses inputs and produces outputs that allow the expression of these values and the achievement of these goals. The process is not perfect as economics and human relationships place limitations on the ability of the business to completely align every value and achieve every goal. However, the closer the business comes to meeting these wants and needs the greater is its chance of surviving from one generation to the next.
A successful farm transition and succession plan will transfer the human, business and financial capital to the next generation in a process best suited to achieve success and will necessarily involve the following elements:
Retirement Plan - This aspect of the plan will determine the needs of the exiting generation during their retirement years and how the farm business will meet those needs. It is important that the retiring generation be insured an adequate retirement income that does not present such a drain on the farm business as to endanger its chances of future success.
Estate Plan - Ultimately the exiting generation will pass on and the plan must specify how farm assets will be distributed among the heirs upon the death of the owner(s). It is critical that this aspect of the plan treat each heir fairly while simultaneously maximizing the opportunity for the farm business to succeed in the future. The estate plan also seeks to minimize the tax burden of the heirs.
Transition Plan - This aspect of the plan focuses on strategies to transfer ownership, management and control of the farm business to the next generation. Transferring management is an often overlooked or inadequately considered aspect of the plan that leads to the failure of many transitions. Transferring management requires a great deal of time, communication and patience on both the exiting and inheriting generations.
Business Plan - This aspect of the plan focuses on the future business goals of the farm and formulates strategies to achieve those goals. It is an important exercise to critically and honestly evaluate the farm business to determine what direction is best for the future. Most farmers make the mistake of just maintaining the status quo rather than using the transition as an opportunity to make substantive and needed changes to the farm business (e.g., dropping unprofitable enterprises).
Land Use Plan - This aspect of the plan focuses on the current versus future, potential uses of the farmland. This may include a decision on whether to keep the land in agriculture or sell it for development, or sell the development rights in a farmland preservation program, etc.
These are the parts every viable farm business transition and succession plan should consider. Many professionals (e.g., accountants, lawyers, consultants, extension educators, etc.) are available to help you put together a viable plan. However, the most important aspect of a well-designed and viable plan will be the communication among the individuals affected by the plan. It is impossible to stress this aspect enough, because communication is key. Everyone affected by your plan must be able to honestly and openly communicate their wants, needs, values and goals. Developing your plan will not happen overnight, thus, through every step everyone involved must be able to give their honest and open input. The pathway to a successful plan is impossible without this important aspect.