“Sunset years” means taking a step back from the business and slowing down. But it’s rarely a full step, as very few farmers actually retire; some don’t even plan on it. Still, if your goal is to pass the farm on and minimize tax liability, you want to do it right. Success requires planning and lots of conversations. But what questions should an owner and heir ask to start the process? Read on.

Questions for owners and heirs

Should we have a transition team? — Yes. In fact, both generations (owners and heirs) should put together a financial team, says Jessica Groskopf, University of Nebraska Extension economist. Teams may include a lawyer, tax accountant, banker, certified planner, or all of them.

“A couple sets of eyes on those documents is always better, and it doesn’t mean you don’t trust the other side,” she says. “An attorney may say this is the transfer plan, while the tax accountant will review tax implications. A banker will say if can we afford this, and a planner will show how to implement.

“No single professional can do everything for you,” she adds. “You need a team. You are the ultimate decision-maker. It should be meetings with all these people, and you are the one who calls the shots.”

Questions for owners

Owners, what is the ideal scenario for your assets at your death? Before you do anything or meet anyone, have this idea clear in your mind.

Related:Reimagine retirement: Build a custom farm succession plan

“Often, when I talk to owners, they skip to the mechanisms before answering this question,” Groskopf says. “It can get really confusing if you don’t have this question answered.”

And don’t just think it; write it out. Then when you confer with someone on your transition team they will know your ultimate goal and can eliminate options that don’t work. They can then start to work with others on the team to get the transfer done the way you want it done.

Next, owners should ask themselves a series of financial and emotion-based questions:

Lastly for owners: Is renting the land your retirement plan? Consider how different rental agreements impact Social Security benefits and income taxes. Renting land, whether for cash or under crop share, can be counted as income for social security purposes if you have an active role in the production or management of the crop or livestock. These activities are called “material participation.” Proper rental agreements may require full advisory team meetings and input.

Certified financial planners can help with these questions. They will ask more questions such as: How much do you have saved and what are your sources of income for sunset years? How long do you expect to live? How much income per year do you need to live? What is your withdrawal strategy?

Different assets have different rules and tax implications. A rule of thumb is retirement withdrawals equal 3% to 5% of capital balance.

What are your plans for long-term care? Owners don’t want the cost of a retirement home to consume the capital in the business. Are you insurable? If not, there are other strategies for long-term care, but it will require you to give up asset control at least five years in advance.

Questions for off-farm heirs

Questions for on-farm heirs

“Let’s say you calculate you need $90,000 a year to live a reasonable lifestyle,” Groskopf says. “Are you ready to communicate that to your parents? How will you build wealth, save for your children’s education, or save for retirement, especially if you are expected to buy out siblings or other family members?”

Buying out family members

If you plan to buy out other family members, the on-farm heir needs to figure out if you need cash down or equity to do this. Work with your banker. Equity is debt-free ownership of an asset or difference in asset value and purchase price. Land loans usually require 20% to 30% down.

“One way we see this working is to purchase a life insurance policy, backed up with a buy-sell agreement that can provide you cash upon the death of an owner,” Groskopf says. “The challenge with this is estimating the amount of death benefit needed to purchase the owner’s share. The owner must be insurable and must pay insurance premiums consistently. Work with your transition team to determine if this makes sense.”

Put Q&A into a strategic plan

Owners and heirs should each ask and answer these questions without the other group in the room. Then at some point, meet together to find common ground and negotiate out the differences.

“The goal is to come up with a workable plan that everyone can agree to,” Groskopf says. “You may or may not need your advisory team in these meetings. But you do need to have them together to talk through these questions and have an idea where you’re headed.”

When it comes to money and family, some ticklish points need to be worked out:

Like marriage counseling, one of the most important questions is to determine money mindsets. What is your attitude toward debt? Sometimes there are big differences between owners and heirs.

“Often it’s owners getting out of debt, and at 65, 75, 80 years old. They don’t want to take on any more debt, and that might happen in a farm expansion,” Groskopf says. “The heir says, ‘Now I’m here and we need to expand business and the way to do this is with debt.’ So you need to have discussions on how you manage this going forward.”

The final question to address is, how and when will your finances be tied together? Will you have a single bank account that manages it all? How will withdrawals from “our” accounts be managed?

If you don’t do this together you can oversee it separately — everybody writes a check and receives their own check.

“If you are trading labor for use of equipment, set a dollar-per-hour rate for each task, clock in and clock out. And at the end of the year, you swap checks for labor put in by each family member,” she says.

Stress-test plan

Once you’ve gone through this process, stress-test your plan. People die out of order; that’s reality. Put your family members’ names in a hat and draw out a name. If that person dies, does your plan work the way you think it should? Does everyone know what to do?

For the younger generation, remember that your parents owe you nothing, except honesty. Don’t just think of a plan; put it in writing.

“It’s not real if it’s not in writing,” Groskopf concludes. “If it’s not in writing, it’s a hope and a wish.”