The long term needs of the farm should be your primary concern. Keeping up with the day-to-day operation of your farm can sometimes make it difficult to step back and think about a bigger picture: your farm’s legacy.
To date, small business succession planning trends don’t look good. One study estimates that 70 percent of family businesses will fail to make it to the next generation. With 98 percent of all farms owned by families, the imperative for planning is clear for farm operators who would like to transition their land and operation to the next generation.While legal structure, estate documents, business documents and financial instruments are all important to a successful farm transition plan, this article focuses on another important part of the planning equation: People.
Consider this hypothetical farm situation. Here is the background:
- The farm operator is 60 years old
- He is married to a supportive wife, a trusted partner in the farm operation
- They have four children – three sons and a daughter
- The oldest son works on the farm. He has always been expected to help out with the workload and carries more of it than the other three children
- A second son who also works on the farm never finished school and is a bit of a problem child
- The third son went to college, majored in business administration with a minor in agricultural science. He is a lot like his dad which causes relationship problems
- The last child is a daughter. She has a close relationship with her mom and is the apple of dad’s eye. She is married and works in town as an elementary school teacher
- Dad has a preconceived notion the farm should be operated by the oldest son who spends the most time working with him
- Dad also feels, like mom, that all four children should equally own the farm and the two active sons should make decisions on operating the farm. They believe this is “fair”
- Estate documents reflect equal ownership and no business documents have been drafted or installed.
Taking the above scenario into consideration, it’s time to ask some hard questions, like:Can the farm survive if you divide it into four equal parts?
If not, how will that affect the farm’s ability to support those who are caring for it? Who will be in charge? Who will make critical decisions on its care?
Another common choice farm operators make is consolidating ownership of the land and operations with the active children. But, that may mean that the non-active children receive less, maybe much less than an equal share of the farm operator’s estate.
One way to compensate children who will not receive a share of the farm is a buy-sell agreement funded by life insurance. The farm operator can buy a life insurance policy, the proceeds of which will allow the children who will operate the farm to purchase the remaining shares of the farm from the children who will not operate it.
While planning for the future success of your operation, you and your family may have to face tough decisions that can be contentious.
The best approach is to confront the issues, not avoid them. In the end, the long-term needs of the farm should be the primary priority to increase the odds of success for the transition and the ability of your farm to provide for your family into the future.
(Donald G. Schreiber, technical director of advanced sales for Nationwide Financial, is a registered representative of Nationwide Investment Services Corporation, member FINRA. Neither Nationwide nor its representatives give legal or tax advice. Please consult with your attorney or tax advisor for answers to your specific tax questions. For more information, contact your local Nationwide agent, call 1-877-OnYourSide, or visit Nationwide’s website for Farm Bureau members.)