Many farm families dream of passing the farm on to future generations, but the reality is that relatively few farm and ranch businesses survive the first generation. Passing your farm to future generations requires concrete steps to build a succession plan.
Farm Succession Planning
Protecting the Next Generation
Critical issues in succession planning include:
- Planning for changes in management from one generation to the next.
- Transferring asset ownership from one generation to another generation.
- Anticipating life events that could change the succession plan, such as unanticipated death, divorce, and disputes.
The major elements of a succession plan include the following.
Farm Management Team. The founder and retiring member must start to include the future generation in management decisions to make the transition successful. This typically involves:
- Developing a team approach to making decisions rather than the older generation continuing to make all decisions without any input from the younger generation.
- Fostering management skills in the incoming generations.
- Training the younger generation in all skills necessary for management of the farm.
- Put in place an accountable system of communication.
- Perform evaluations of all members of management, young and old, so that all of them can address weaknesses and build on strengths.
Control Issues. Controlling decision making and passing that control to a future generation is at the core of succession planning. Additionally, for the success of the farm and the success of the succession planning process, quality decisions arrived at by a joint consensus process are preferred over an authoritarian process.
Problems Will Arise. A good farm succession plan will anticipate that problems will arise. Maybe someone dies much sooner than anticipated. Maybe someone divorces. Maybe disputes arise among the parties that creates division. A well-developed succession plan should plan for these scenarios. A well-drafted Trust written by an attorney that is an expert in farm succession planning can help allow for these situations. You should talk to your farm succession planning attorney about your concerns and he can develop a plan with you.
Compensation to all Generations Involved. The younger generation will need adequate compensation while they are not the full owner of the operation. Some of the compensation can be in the form of current or future ownership, but they also have to make a living during this time. The older generation should be adequately compensated for their labor, as well as rent income from land and machinery, in a lot of cases. Other operations will benefit from other arrangements. Each operation will have a customized farm succession plan if an attorney well-versed in farm succession planning is involved.
Ownership Interests Valuation. The farm and other assets will need to be valued in some manner, either by a formal appraisal or values agreed upon by the parties.
Protect the Older Generation. The outgoing generation will need various protections in place to assure them that they will not be forced out by the incoming generation.
Protect the Future Generation Too. The incoming generation will need some protections while they are not owners (in full) and are working (usually a lot) on the farm and trying to ensure its survival to them. Your farm succession planning attorney should be versatile and proficient in drafting numerous documents to facilitate the transfer in your specific situation, for example you may need a first option to purchase, a buy-sell agreement, a compensation agreement, or any other number of documents in addition to the usual ones.
Encourage Phased Retirement. Another element of a succession plan focuses on encouraging senior individuals to retire. We have found that the founder phasing into retirement usually works better than going “whole hog” and going from full-time work to completely retired all at once. This way, future generations can transition into management of the farm instead of getting all of this responsibility at once.
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