Common Mistakes in Farm Succession & Estate Planning
By Amanda Smith
Family farms are dynamic creatures, and their perpetuation requires extreme care. Nothing is stable or stagnant, and creating a plan for the future requires careful consideration. Many farm owners have created plans, or intended to, without attentiveness and intentionality. The result is often financial devastation and family dissention. Addressed here are some of the most common mistakes to avoid when planning for the continued legacy of your family farm.
Assuming you have “nothing but time”
The assumption that you have time to plan for transferring your family farm into new hands is possibly the greatest gamble you can play with your operation. There are endless stories of family farms who were divided and destroyed by the untimely death of the farm operator, and countless other farms that have landed in the laps of sons and daughters who are too young and inexperienced to successfully manage on their own.
Keeping it close to the vest
“He left his fortune to some guy he barely knew” might make for a great line in a country song, but it’s probably not the legacy you want to leave with your family farm. There may be nothing more frustrating for a potential farm heir that to be told “there is a plan, and you don’t need to worry about it.” Such comments can often times leave said heir assuming that either a plan doesn’t actually exist, or they are not a part of it.
Communication is critical in succession planning, and the time for such communication to happen is not in an attorney’s office in the weeks following a funeral. Keeping it a mystery is a mistake. All potential heirs and managers need to fully understand the plan for succession, and how the distribution of assets will occur. In the best case scenario, they are a part of creating the plan. Security comes in knowing what lies ahead for the future, and choices for heirs and their families become much easier when they are certain about their future.
Distribution of Assets is bigger than “Put your name on that”
My grandmother used to keep a roll of masking tape and a Sharpie marker in the junk drawer, specifically for the task of marking items in her home to go to certain kids and grandkids. Much to no one’s surprise, that method was highly ineffective and haphazardly respected when it came time to gather our treasures. Great dissention existed over a few antiques and several collections of dishware.
Family farms are storehouses of treasures, from Grandpa’s first tractor to Grandma’s favorite apron. They tell the story of our generations, and they create grudges and heartaches that last for years when not divided with intentionality and legal backup. Antiques and heirlooms are small beans next to the physical assets of a modern family farm. It is not enough to make a list of your land and equipment, and trust it to the family to honor your wishes in dividing it. Legally binding plans for distribution of assets protect your wishes, your legacy, and your surviving family’s relationships.
Assuming death is the only possibility for necessary succession
Agriculture remains one of the most hazardous occupations, with a very high incidence of death and disability as a result of accidents. According to the Center for Disease Control (CDC), 100 workers are injured in farm-related accidents every day. The rate of death is 21.4 out of every 100,000 workers, an incredibly high statistic. Therefore, not only are agriculture accidents prevalent, they are also often very serious. Not only do farm deaths and disabilities occur due to accidents, but they can also be caused by stress, pesticide exposure, extended term hearing loss, and other health-related issues.
In previous articles, we indicated that succession and estate plans need to include provisions for the transfer of management to occur before the current generation in unable to physically and/or legally make decisions. If the current manager becomes incapacitated in such a way that they are not competent to lead, or at least sign over that responsibility to another person, everything remains at a standstill until the legal process can be completed. If such a pause happens during a time when business decisions need to be made, catastrophic financial consequences can result from the delay.
In a future article, we will discuss how farm safety and farm accidents can be reduced in all sizes and types of agriculture enterprises. Look for that in the coming weeks!
Failing to address the dynamics of your family
It should be somewhat obvious that not all farm families have the same personal dynamics, and therefore not all succession plans can be cookie-cutter simple. In both the transfer of management and the distribution of assets, various family dynamics should be considered. Here are a few:
Blended families require binding inheritance plans – if all of your assets are left to your surviving spouse, and the asset distribution beyond the spouses death is not clearly defined in a legally binding form, it is entirely possible that said spouse could alter your wishes in terms of asset distribution…leaving your children without the inheritance you intended.
Naming an executor or manager is bigger than “The one that is always there” – The child who stays home to be a part of the family farming operation may or may not be the best choice for its management in the future. Consideration has to be made regarding who has the best management abilities, experience, and intentions relative to your operation. In the first article in this series we discussed how to navigate fair vs. equal, and in the second we looked at business structures that allow for varying types of succession planning and asset allocation.
Providing for family members who are disabled – In the case of disabled children, and even disabled or elderly parents who need continued care, provisions need to be made for asset allocation and medical power of attorney to support them.
It takes money to die
While the net worth of a family farm may be very large, often times the cash on hand and even highly-liquid assets can be very small. If you have a non-farm heir and the plan is to provide them with cash upon your death, such a provision needs to be made for that. Many times the obvious and simplest answer to this may be a life insurance policy. However, you may choose to provide assets in other forms that do not damage the integrity and sustainability of the operation. Making sure that ownership of assets is in proper order, so that timely sales can be completed, is also important to consider. A well-defined succession plan is only effective if the assets can be accessed to follow it through.
Filing the estate plan, and forgetting it
The estate planning process is never meant to look like a round of calf-roping. You don’t take off out of the chute, focusing on nothing but tackling and conquering the final document, and then throw your hands in the air and walk away when it is accomplished. It is not a final destination.
A much more effective illustration is that of an artist’s great masterpiece. If the family farm you pass on to your children is the greatest work of your lifetime, don’t you want it to be protected and handled with care? A succession plan is the written documentation of the family farm and all that it entails, including the physical and human capital.
Da Vinci and Michelangelo often spent years creating a masterpiece in physical form, and many decades before that developing a vision for the great work. The maintenance on these wonders continues still today. A succession plan document is a work in progress, and requires maintenance even after the final draft. Plans should be revisited upon all of these occasions, and more:
- Acquisition or sale of an asset, including equipment, land, structures
- Change in family dynamics – birth, death, marriage, divorce, relocation
- Adjustments in legislation regarding income, estate, and capital gains tax
The simple conclusion is that estate and succession plans can accelerate a smooth transition of your farm from one generation to the next, and the lack of such a plan can destroy a family’s farming legacy. There really is no reason or valid excuse to delay the process, and a well-organized team effort is key to an effective plan. This is not something to tackle on your own, but instead with a team of legal, financial and family constituents who have a vested interest in your family farm.
The first step is always the hardest, but can be as simple as a family meeting to discuss the vision for your farm’s future. It may not be an easy conversation, but a necessary one to prevent your family farm legacy from becoming one of a failed operation, or worse even, that of a family torn apart.