It is impossible to know how events will play out, both on a grand scale and in small and unexpected ways. Last minute decisions, like those of the rock musicians who won seats in bets and then were killed in the Buddy Holly plane crash in 1959, are often said to be a function of fate or a larger plan. But that is not how you want to handle planning for the succession of a family farm. Today's family farms are poised at an important place in time. A lack of planning could spell a disaster for families, farms and our national ability to produce food.
Planning to pass the family farm down to the next generation requires consideration of a large number of facts, from the size of the farm to the emotional health and dynamics of the family itself. Running a family business of any kind is challenging, but when the business is a farm, where capital investment and uncertainty are both enormous, the potential for a perfect storm of disastrous proportion is always present. Your best ally is a plan, as described in Iowa Farmer Today, "Discuss farm estate and succession plans now so no heir is 'left standing.'"
The article advises every farm family to create and review an estate plan and a farm succession plan. These two plans may overlap, but they are two different programs. The estate plan includes documents such as a will or trust, powers of attorney, farm continuation language, executors, trustees, distribution plans, and the age of distribution for minor beneficiaries, as well as contingency plans in the event a beneficiary has predeceased or is disabled at the time of your death. The estate plan includes the coordination of beneficiary designations of retirement plans and life insurance. An important point is to maintain liquidity to pay debts, taxes, or administration costs. This may not be accomplished by simply naming your children as beneficiaries, as many do.
A farm succession plan typically includes the business operating agreements, terms of future purchase, the terms for lease if not purchased, and limitations on ownership. Which of the parts of an estate and farm succession plan will be most important to your family will depend on the timing and what stops the music in the estate.
A key part of any estate plan is identifying ownership and an updated fair market value of the estate assets.
Many folks think that an estate plan just deals with the distribution of assets at death. But an estate plan should identify and discuss strategies for the distribution of any assets that could or should be distributed prior to your death, in addition to those distributed when you pass away.
A good estate plan not only identifies assets but sets out a timeline to distribute those assets with a process that is tax efficient, while keeping in mind the general goals of the estate.
Sharing plans for your estate and business succession is critical for the effective and efficient transfer of the operation. You can avoid some hurt feelings and selfishness down the road if you explain your goals and transparently deal with the heirs whose ideas of distributing your estate may not be the same as yours.
A critical aspect of a succession plan is to identify the method of pricing the assets that adequately represents not only the structure of the business but also the goals of the owner. Another important component of a complete plan is a source of funding when the transition occurs, such as a loan or insurance if the buyout would occur at death. Cash flow is essential for any viable business.
Business succession and estate planning is more of an art than a science. Although there are parts of each plan that are consistent, the real value of an estate and a business succession plan is recognizing the unique issues of each individual situation. There's no "boiler-plate" plan that will work and should be automatically used for every family business. You need to find a way to create plans that fit your distinctive goals.
Sometimes being involved in a farm business without a concrete estate and farm succession plan can be a little bit like playing the game of musical chairs: when the music stops in your estate, don't let your farm heir be the one left standing with uncertainty and confusion—and ultimately find themselves out of the game. If your or your family members have questions about your estate planning needs, visit our office for one of our free workshops.
Reference: Iowa Farmer Today (October 16, 2015) "Discuss farm estate and succession plans now so no heir is 'left standing'"
Succession Planning for the Family Farm to Protect Your Legacy