What are the biggest mistakes farmers make in transitioning their business to the next generation?
Curt Ferguson has spent 30 years in estate law, working with farm families to plan their succession and transition their business. And just like the insurance commercial says, he knows a thing or two because he’s seen a thing or two. Here’s a look at the top 10 mistakes he’s seen farmers make in transitioning their business.
Related: Road map for a transition
1. I’m immortal. The farmer who thinks he can pick his retirement date and his death date will have a tough time when the second date comes. “If you care about what happens when someone else runs the farm, you must start working on the transition a long time before you die or retire,” Ferguson says. “Don’t put it off.”
2. Taxes are my only problem. Gift taxes, estate taxes and the monstrous deferred income tax are not your biggest transition challenges, if you follow good advice. The family, control, management and relationship issues are the hard ones. “People want to say, ‘Just help me avoid taxes and probate. The rest will work itself out.’ Nope, it won’t,” he says. Relationships and abilities are too important.
3. Land is my only asset. It’s not. Ferguson says farmers actually have three assets to pass on, and they need to do so in the right order: 1. Opportunity 2. Control 3. Capital.
4. I’m still gonna call the shots. Give opportunity with gradually increasing control, he says, and don’t give people management authority they aren’t prepared for or capable of. “Preparing the successors means giving them enough responsibility now, while you are still around, so you can mentor them,” he adds.
5. I’ve got plenty of time. For most farm families, the transfer of capital (especially land) will happen at death as part of the estate plan. Steps in that direction must be planned well in advance, and the larger the farm, the more time it takes.
6. Everyone knows what I want. Want your successor to think like you? Think out loud. “Your successor can’t read your mind unless you expose it to them,” Ferguson says. “For those who care about the future of the farm, the wisdom and values of the older generation are a critical foundation.”
7. Nobody can improve on my work. Core values are timeless, but no business can stay the same and flourish into the future. No one, even you as the founder, knows everything. “Expect the next generation to make things better,” Ferguson adds. “Encourage the next generation as they bring innovation back to your operation.”
8. Someday this will all be yours. “If your 55-year-old successor isn’t making a lot of important decisions by then, you may be the reason your farm will not flourish into the future,” he says.
9. Everyone’s like me. Don’t force a descendant to do what he or she doesn’t have a passion for. And don’t make people work together in ways they don’t want to or aren’t suited for. Some kids will want to pursue other careers. “The right plan will still benefit indirectly in some way, while at the same time protecting the active successors,” Ferguson says.
10. I’ll gift and it’ll be fine. Transferring capital, by gift during life or through your estate on death, is an opportunity to shield it from catastrophes and future estate taxes. Don’t just move assets to the next generation, Ferguson says. Instead, transfer assets to beneficiary-controlled asset protection trusts, which will protect assets from lawsuits and failed marriages. And, in Illinois, assets in such trusts, plus their appreciation, can remain free of future gift and estate taxes forever.