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Serving: WI

Keeping a farm in the family takes planning

Harlen Persinger Farm and silos
FARMING FUTURE: Completing a successful farm transition can be a cumbersome process, but entering into the agreement ensuring all parties have considered the details and are on the same page will result in the farm business continuing on for the next generation.
Agrivision: Creating a farm transition plan is a process that takes time.

My wife and I turned 62 this year. We grow crops on 500 acres that we own in south-central Wisconsin. Our two daughters are married, have successful careers off the farm and have no plans to farm after we retire. Our nephew is married and running his parents’ grain and hog farm and is interested in farming our land. His wife is an elementary school teacher and they have four young sons. His parents are retired. Our farms are 4 miles apart.

He doesn’t have the money to buy our farm, but I’m wondering if we can work out a long-term lease agreement with him that will work well for my wife and me as well as our nephew. He does a great job of farming the 1,200 acres on his parents’ farm. They only own about 300 acres. He also finishes about 2,000 hogs per year. He has a good line of equipment — about half is owned by his parents, and he owns the other half. He has one full-time employee and one seasonal employee — me. I wouldn’t mind helping him plant the crops in the spring and harvest in the fall.

Is there any way to help him buy some of our land so he can own some land and maybe eventually own both farms? What are your thoughts?

Tom Kestell: You pose some interesting questions, and I’m glad you have given some thought to your family’s future and your own. It is also admirable that you want to enable your nephew to have a pathway to someday becoming a landowner and future operator of your farm. I think the first step is to evaluate your total situation. What is your financial status, your future goals, your future financial needs, etc. What do you hope to leave to your daughters? What do your daughters expect from your estate? What situation does your nephew’s parents have, such as debt financial commitments? Expectations for the future?

Look at the pros and cons of working with your nephew. You obviously respect and like him, and this is a huge plus for working together. No matter how much you want to help out your nephew, it is always important to have a well-thought-out legal agreement between the parties involved so that both parties are protected, and everyone understands the details and expectations everyone is to live up to. I think you truly want to foster your nephew’s farming career. What about his parents? How can they be involved? I would have a brainstorming session with all the parties involved and come up with a harmonious pathway forward where everyone can be a winner. The options are almost endless, so take the time to explore, plan and discuss in detail, and then finally move forward. Good luck.

Sam Miller: Farm transitions take time and effort to complete equitably for all of the parties in the transition. You have several objectives involved in your question: transitioning into retirement, transitioning the farm, the eventual estate for your daughters, assisting a family member as both labor and to build his business. Buying a farm takes an investment of equity and is only paid for over multiple operating seasons as a long-term asset.

There are several options available to you if you want to sell to your nephew, including renting the farm on a cash basis, share-renting the farm, working out an option to purchase or first right of refusal, selling on a land contract, or an outright sale. Discuss first with your spouse as to what you would be willing to provide with regard to these options, and then discuss with your nephew about any and all options acceptable to you. Once you come to an agreement, get it in writing so each party knows what the plan is. You may also need to update your estate plan or wills with your attorney to reflect what you have negotiated. Good luck transitioning the farm to the next generation.

Katie Wantoch: It’s great to hear that you and your wife are willing to help your nephew expand his farming enterprise. A number of business succession tools may be applied to your farm transition goals. First, I would suggest that you and your wife take the time to consider your future estate planning needs (personal and financial goals, family living needs, and other contingency plans) before consulting with an attorney to assist you with preparing the appropriate tools. These tools may include a buy-sell agreement, leasing of assets and installment sales.

Buy-sell agreements may be used with the creation of a new business entity with multiple owners, such as you and your wife, and your nephew and his wife. You and your wife may own a majority of the interest in this entity initially, and an agreement would detail how your nephew and his wife could purchase and/or be gifted shares of the business over time.

Leasing assets is another option, especially if your nephew needs assistance with cash flow for his farm business. A lease could be considered as rental of property (operating lease) or acquisition of property (capital lease). Asset ownership and tax implications need to be determined when entering into either lease contract.

The final option may be to consider an installment sale of the farmland. You and your wife may choose to accept annual payments and reinvest them for your retirement needs. You should consult with a tax preparer or accountant regarding the income tax implications of an installment sale.

Completing a successful farm transition can be a cumbersome process, but entering into the agreement ensuring all parties have considered the details and are on the same page will result in the farm business continuing on for the next generation.

Farming and going to school

I’m a senior in high school in northwestern Wisconsin. My parents own a 250-acre dairy farm and milk 150 cows. This year, I rented 120 acres from a neighbor — my dad’s uncle. I planted 60 acres of soybeans and 60 acres of corn. I have 60% of my crop forward-contracted. I rented equipment from my parents to plant my crops, and I plan to pay another neighbor to combine my corn and soybeans this fall. I want to do this again next year, when I will be going to the University of Wisconsin-River Falls to major in crops and soils sciences. My plan when I graduate from college is to work as an agronomist for three years and then start farming full time. In the meantime, I want to build up my land base and start buying equipment as I can afford it. I will probably still rent most of my equipment from my parents. Where is the best place to invest my money? Should I buy equipment? Should I form an LLC? I want to keep my debt low in case these high grain prices don’t last.

Tom Kestell: Congratulations on your ability to make solid plans at your young age. I’m happy to see that you put education in first place on your agenda. Getting an agronomy degree at UW-River Falls will help you throughout your career and of course give you contacts to keep you updated and informed in a rapidly changing career in farming. Please enter River Falls with an open mind, and be willing to step outside your comfort zone to explore new ideas and develop the ability not only to think outside the box, but to see things from all the different angles that your farming career can be approached, engaged in and developed to change with the changing times.

Invest your money in things that make money. New paint equipment, new pickup trucks, etc., will not yield the same return on investment as the actual inputs of farming will. Renting top-quality land, using top-quality seed, and implementing proper weed control, correct fertilization and crop insurance to protect your investment all offer a better return.

Timing is one of the most critical and cheapest inputs you can control in your farming ventures. Being in the right place at the right time is seldom luck, but is the result of planning, hard work and dedication to your profession. Don’t expect handouts or freebies, but rather work cooperatively with your parents, your neighbors and everyone you come in contact with. Always appreciate others’ help and advice. Rent when you can, buy when feasible, and try to be a good neighbor and tenant. These things will allow you to grow into ownership as your journey progresses. Calculate your risks and rewards so you make steady progress toward your goals. Good luck in your future endeavors.

Sam Miller: Congratulations on beginning a cropping business and thinking through plans to develop skills to grow it in the future. As to where to best invest your money, seek investments with the highest returns. At the beginning of your business, you will need working capital to operate and to handle any adversity that inevitably will occur — drought, excess moisture, an early frost, etc.

Then concentrate on the key pieces of equipment that allow you to operate efficiently and are not easily custom-hired. Bigger-ticket items like combines don’t make sense at your current size, but maybe there are some items you could fill in from your parents’ line of equipment. Land is a good long-term investment but difficult to justify as you are starting the business. It would take a great deal of capital to meet the down payment requirements, so keep it in mind, but not at this point in your growth cycle.

Keeping your debt low is another way to manage adverse economic situations. Be certain to have a price risk management plan, including the use of crop revenue insurance and how you plan to market the crop. At this point it is fine to be a sole proprietor; if you develop a more formal relationship with your parents for the equipment, it may make sense to form a limited liability company. Good luck gaining your degree and executing on your farm business plans.

Katie Wantoch: I want to applaud you for being willing to commit to pursuing your farming aspirations while also going to school to increase your knowledge on new and innovative agricultural practices. Create an annual budget for your cropping operation to determine what your profits will be after all expenses have been paid. You should also create a list of capital items that will need to be purchased or replaced, and prioritize this list. When you have profits each year, you can reference this list to see if you have adequate funds for the first listed item(s).

As an individual, you will be operating your farm business as a sole proprietor. As you expand or diversify your business, there are legal questions you should look into to determine if creating a new business entity is right for you. There may be high costs and time to establish and maintain a separate entity, including filing fees, tax preparation and filings, etc.

Filing the legal paperwork may create an entity, but it is not enough to offer you the protection unless you are also following other business practices to keep your personal and farm businesses separate. This would include maintaining separate bank accounts, record keeping, bylaws or operating agreements, etc. Now may or may not be the time to pursue this additional paperwork. But with hard work and a little planning and effort, you can achieve anything! Good luck with your future ag career.

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis.; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Extension ag agent specializing in economic development, Dunn County, Wis. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email them to [email protected].

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