Your farm or ranch is more than a business, or even a way of life — it’s your legacy, something that may have been in your family for generations. You want that to continue, so one day your grandchildren can walk the land with their children, and take the same satisfaction in knowing what they do every day is a vital part of our economy.
But the farm succession planning process is not an easy task. Land, equipment, equity, your own retirement — how do you even begin to think about handing your business over to the next generation? First, you’ll need a trusted team of professionals, including your insurance agent. And then you’ll need to start the succession planning process as soon as you can.
Starting the Farm Succession Planning Process
Think Long and Hard About Who Will Get the Farm
Every family situation is different. The best thing you can do is step back and look at your succession goals as unemotionally as possible. Ask yourself these questions:
- Would your successor(s) be as committed to the land and family business as you are?
- Are they in it for the long haul?
- When the time comes, will you be ready to share control and management decisions?
The best business decision could be difficult for some members of your family to take, but keeping the health of your farm or ranch at the center of your decision-making process can help ensure the its continued success.
To develop an effective farm succession plan, you need defined goals. What is your intention when you transfer the family farm to the next generation? Spell out clearly-defined roles for your successor(s), as well as those who have a vested interest in the transfer but may not be working on the farm. Farm succession can be an emotionally fraught subject. The more time you have to plan and set up expectations for your family, the better off everyone will be.
Your operation has a lot of moving parts, so transferring ownership is an important step of your farm succession planning process. Carefully consider these aspects before transferring your farm or ranch to your successor:
This can be dealt with in many ways. It can be sold outright or in installments, or ownership can be transferred when machinery is traded. Each option has tax implications, so you’ll want to consult with your tax advisor. Gifting machinery may help limit some income tax consequences, but could also result in a gift tax. Finally, machinery can be leased to your successor, but you will have to determine beforehand who will pay for repairs.
Feed and LivestockAs with machinery, there are many ways to transfer ownership of feed and livestock. If you have breeding livestock, you may decide to sell a portion of your breeding herd to your successor. Payments can be made in installments, or you may choose a roll-over approach. In the latter case, you continue to own the breeding herd, but you and your successor share joint ownership of the offspring.
Feed and market livestock can also be sold or given. Many opt to transfer this type of livestock at the low point of the feed inventory (just before harvest), or between the sale and replacement of market livestock.
Or instead of selling your successor an interest in your market livestock, the livestock can be inventoried. In this case, you will receive the inventory value of the livestock when it’s sold. The remaining proceeds will be divided between you and your successor. This approach can also have tax implications, so review it with your tax professional.
LandWhen creating a farm succession plan, consider how you want to transfer ownership of your land. Land can be transferred during your lifetime by sale or gift, or upon your death. Sales may take place through cash or installments.
Gifting your land to your children can help with gift taxes, especially if you’re dividing it among several people. You can give up to $10,000 of property each year (to as many people as you’d like) without paying gift tax.
However, gifting a property means that you are also giving up ownership rights to that property. This means you may end up paying rent to your heirs.
Transferring land upon death is the most common because it allows you to use the property and receive income from it through retirement. Tax laws vary regarding inheritance. Again, consulting with a tax professional is an important step before making land transfer decisions.