I just filed my taxes for this year. I’m 68, I’m thinking of retiring and I can’t think of passing down the farm. But, I have 600 acres, 400 head of cattle in a cow-calf beef operation and I also run a farm machinery business. I have three children, two of whom I want to pass the farm down to, and the third I would like to pass the farm machinery business to. It’s a hard discussion for me and my family. I also don’t know the best way of transitioning the business so it benefits everyone at tax filing time. I’d like to get this done this year, if possible. Where do I begin?
Dale Johnson: You’ve already accomplished something. Assuming your children agree with your plans, you have already accomplished a lot in deciding to transfer your farm business to two of your children and the machinery business to the other child.
Your succession plan in passing these interests on to the next generation has two steps:
1. Transferring the businesses through a business plan.
2. Transferring the assets, and liabilities, through an estate plan.
Taking them in this order simplifies the process.
The first step in transferring your businesses is for your children to develop business plans describing what they want to do. What are their missions and goals? What crops, livestock and machinery enterprises will they focus on? What similarities and differences will there be in the way they operate the businesses versus the way you operated the businesses? What is the timeline for transferring the businesses?
Make no mistake, these are their business plans, but they should also welcome your wisdom, experience and advice in developing them.
The University of Maryland Extension has developed a business planning guide to help your children in developing business plans.
The second step in transferring your businesses is to develop your estate plan, including your mission and goals for transferring your assets and liabilities.
You are responsible for developing this plan, but you should welcome the wisdom, experience and advice of your children. With their business plans as a guide, it will be much easier to make some crucial decisions.
Armed with their business plans and your goals for your estate plan, you can now approach your attorney, accountant or insurance agent for technical advice with the details and finalizing your estate plan. Succession planning is not an easy process, but if you will follow these steps you will be more successful:
• Start now by opening the lines of communication with your children.
• Sit down with them and discuss the process. Get them started on their business plans.
• Start thinking about your estate plan.
• Set timelines for completion. Have regular meetings to monitor progress.
• Identify the professionals who will help you.
As you complete this process, you will find peace and fulfillment in retirement, and your children will find satisfaction in carrying on the family businesses.
George B. Mueller: Consider forming an LLC. Twenty years ago, I was your age and faced with the challenge of how to best pass down the estate. I am going to share with you what Mary Lue and I did, but be sure to consult with tax experts before making any decisions.
Our main goal was to pass on our successful farm business that we had worked so hard to build to future generations, both inside our family and outside, so they could keep it prospering and benefit from its bounty.
Our second goal was to gift each of our five children an equal share of the business. To do this we formed an LLC and listed the net worth of the business as shares of “capital account.”
As the net worth of the business went up, so did the shares of capital account. So, each year, Mary Lue and I have transferred $25,000 of capital account — $12,500 from each of us — to each child and more recently to each of 13 grandchildren.
After they reach the age of 25 they are free to cash in 5% of their capital account each year (more with special permission). This is how we are getting ownership of the farm, equally, to the next generation. Some cash-in their capital account for their own private projects. Most, however, let their capital account grow with the farm. Some even purchase extra capital account to increase their share of farm ownership.
So far, our system has worked well. Our middle son runs the farm and has put most of his earnings back into the operation. He now owns more than his parents.
I have told you all of this with the idea of you possibly forming an LLC — perhaps two LLCs — and passing on your businesses in a similar way. It is a system where you can treat each child equally. It is a system where you can stay involved by working a little each year, perhaps running errands, driving a truck and working with the books.
Good luck on a wonderful, gradual, retirement!
Glenn Rogers: Take your time. Transferring the farm from one generation to the next may take five or more years. I've seen it take much longer than that.
It’s not a simple buy and sell arrangement. Successful transitions are a process that take lots of time, patience and communication between all parties involved. These involve talking about the strengths, weaknesses, needs, wants, visions and goals of all involved, and to determine if any part of the farm businesses can transition from one generation to the next.
Unfortunately, transfers that need to be completed quickly will end up paying more in taxes than those spread out over several years. Long-term transitions generally end up taking advantage of lower tax brackets, possible capital gains tax rates, depreciation, gifting exclusions, planning opportunities and more.
Thus, while a portion of the management expertise may transfer from one generation to the next in a relative short time, transfer of ownership may take considerably longer, and we need to plan for that long-term transfer.
I recommend printing out several copies of the Center for Farm Financial Management’s “Transferring the Farm” series, available online at https://www.cffm.umn.edu/default.aspx. Share the 11-part series with all the parties and plan on going over them individually and in group settings.
The series will give you an excellent road map on the process. I have found something new in this series each time I read it.
Involve your local Extension agricultural specialist, your local financial adviser, tax adviser and your attorney.
Take your time as rarely do things go as planned and time is needed to work together and plan out the process.
It is essential that you spend considerable time communicating with the next generation to determine their wants, needs and goals, and to determine if there is financial sustainability and a love and desire to keep the farm going.
Everyone needs to determine if you are going to be involved in any part of the business as most parents are involved in the farm in some manner after retirement. You also need to work with your financial adviser to determine yours, and your spouse's, future financial security.
Here are a few key things to remember:
• You can't take the farm with you.
• The next generation will do a lot of things differently.
• If they want you involved and ask your advice, be thankful. This is often not the case.
• The rules will change, and thus farming will be different. This is an opportunity for you to assist management to make those changes in a positive way, and to allow you some time to explore new opportunities and new adventures.
Got a question? Our experts await!
The Profit Planners panel consists of Dale Johnson, Extension farm management specialist at University of Maryland; George Mueller, dairy farmer from Clifton Springs, N.Y.; and Glenn Rogers, University of Vermont Extension professor emeritus and ag consultant.
Send your questions to “Profit Planners,” American Agriculturist, P.O. Box 734, Richland, PA 17087. You can also email them to firstname.lastname@example.org. All are submitted to our panel without identification.