Transitioning the Farm to the Next Generation

Tacy Callies Citrus, Economics

transitioning the farm
By Ernie Neff

Passing a farm from one generation to another can be as simple as waiting for the older generation to die or become disabled. But doing it that way, with no planning, probably won’t be a very rewarding experience for either generation. That was the consensus of several speakers at this summer’s Florida Agriculture Financial Management Conference.

transitioning the farm

Michael Loney

Michael Loney, regional director for John Hancock Life Loney Insurance in several midwestern states, outlined the difficulties a family can experience when it doesn’t have a transition plan. “It not only might be financially more difficult, but it becomes emotionally more difficult and causes a great deal of disharmony in the family, because nobody knew what was exactly going to happen,” Loney said. “And they have to wing it at the time of death or disability or retirement. That’s not a good time to do planning.”

“It’s better to do the planning and have all stakeholders — the non-farming members as well as farming members of the family — involved in understanding what’s supposed to take place and how it’s going to happen,” Loney said.

transitioning the farm

Elaine Froese

STARTING THE CONVERSATION
“The biggest thing for families is to sit down and start the conversation about what the plan is going to look like,” added Elaine Froese, a certified farm-family business coach in Manitoba, Canada. She said family members should discuss all concerns openly, “to understand what each generation wants.”

“The founders typically are looking for security in their income stream,” Froese said. “They want to know where they’re going to live, and they also want to know what their roles and responsibilities are going to be. The next generation is curious as to how much debt liability they’re going to service. They’re curious about when the ownership is going to shift. And they also want to know when the founders are going to let go of power and control so that they can also have a degree of responsibility for management.”

Froese said many farm families put off discussions about a farm’s ownership transition because it can be a difficult topic. She said tools for talking about such a tough issue include “having some curiosity, playing with possibilities, asking better questions, waking up every morning with a learner mindset … rather than a judgment mindset. So that when you’re making plans for the future of your farm, each generation is saying, ‘I think, I need, I want.’” Having such conversations allows everyone to understand timelines for transition and to have clarity about goals and responsibilities, Froese said.

Having such communication offers another benefit. Froese cited a Virginia Tech graduate student’s study from the late 1990s which indicated “the farm families that communicate on a regular basis are 21 percent more profitable.”

Numerous ways to institute and finance a farm transition were discussed at the financial management seminar. Here are two possibilities:

BUY-SELL ARRANGEMENTS
“Buy-sell arrangements are plans put in place in advance of death, retirement or disability that give an orderly transition to that farm to the next generation or to the next shareholder,” Loney said. “It involves working with your accountant, your attorney and your insurance advisor to come up with the proper type of buy-sell arrangement and instituting that plan and putting it in place so all the family members — all the key players — know what’s expected and when it’s going to happen and how it’s going to happen.”
Playing the odds

Transitioning the farm

Blake Willis

CASH-BALANCE PLANS
“We’ve seen a number of farmers use cash-balance plans as a way of transferring ownership from one generation to the next generation,” said Blake Willis, chief consulting officer with July Business Services, based in Texas. “They can do that by making tax-deductible payments to the older generation that is going to leave the business. And the reason a cash-balance plan works well for this is because you have such significantly larger contributions that can be made each year — depending on the owner’s age — potentially $200,000 or more a year.”

If an owner wants $2 million for the farm, he or she can contribute $200,000 a year for 10 years to his or her cash-balance plan. “And instead of the older generation receiving that $2 million and paying tax on it, that $2 million is going tax deductible into a cash-balance plan,” Willis said.

Playing the odds
IF YOU THINK your family farm doesn’t need transition planning because even the oldest generation is fairly young, think again. There’s a high probability that any one member of a family farm could die soon, said Michael Loney, a regional director for John Hancock Life Insurance.

“When you look at probability statistics, individually we each have a very small probability of dying within the next 10 or 15 or 20 years,” Loney said. “But if you have two or three shareholders, or two or three shareholders as well as a key person on the farm, the odds of one of those four people dying in the next 15 to 20 years is rather great. It can be as high as 50 percent.”

In a farm’s cash-balance retirement plan, people can be grouped so that the older generation gets a large contribu-tion, and the younger generation gets a much smaller or no contribution. “They’ve (older generation) received their payment for the farm, and the younger generation now has the farm … And they’ve done it all in the most efficient, tax-deductible manner pos-sible,” Willis said.

According to Willis, a cash-balance plan “definitely needs professional help” to establish and could be operated for $4,000 or $5,000 a year. That’s a “very small cost in relation to the tax savings and the tax benefits,” he concluded.

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About the Author

Ernie Neff

Senior Correspondent at Large