As a farmer, you’ve dedicated your life to caring for your land while supporting your family. Whether you grow crops, raise animals, or both, your farm has many assets – like land, equipment, and buildings – that contribute to your financial wealth.
But what will happen to your farming business once you retire? What if something happens to you unexpectedly? Do you have a successor in mind? If you don’t have a clear answer to these questions, it’s time to start thinking about an estate plan for your farm. While it may feel uncomfortable or difficult to think about, the earlier you begin this process, the easier it can be to transition your farm to a new owner when the time comes.
Growing up on a farm and now a producer myself, this is a topic near and dear to my heart. In this article, I’ll provide insight into what the farm estate planning process may entail, and how farm succession planning has changed over the years.
The Basics
Agriculture plays an integral role in our global economy. Without farmers, people would be without clothing, food, and other essential goods. However, running a farming operation requires a lot of hard work and resilience. Farmers face many uncontrollable risks, like weather, inflation, supply chains, legislation, market prices, and other elements that can impact their livelihood. Farming is the only business in which you purchase inputs at retail and have to sell your production at wholesale.
One thing farmers can control is their estate plan, which determines who receives their assets when they retire or pass away. Farmers can use many tactics to ease the generational transition and find balance between their heirs who are and are not stepping into the business.
Gifting strategies, buy-sell agreements, life insurance, and off-farm savings are all examples of mechanisms farmers can deploy to help reach the dual goal of fairness and business continuity. Working with a financial advisor can help ease this transition, while offering different methods for farmers to diversify their income.
How the Process Is Different
The farm estate planning process varies from the traditional estate planning process in many ways. For one thing, farms are capital intensive: the land, equipment, and buildings climb to very large numbers very quickly. With that, many farmers amass a sizable net worth, but are highly illiquid – meaning they have a lot of “stuff,” just not a lot of cash. That doesn’t mean they aren’t profitable, but the profits are frequently reinvested back into their businesses to provide for expansion, equipment, or technology updates.
This illiquidity can make it challenging to treat family members fairly when there are children who are involved with the business, and those who aren’t, all the while allowing the farm transition. It can take some creativity and give-and-take, but the process can go a lot smoother with guidance from professionals like financial planners, attorneys, and CPAs.
The Evolution of Farm Succession
Years ago, “fairness” was seldom part of the transition thought process. The actively farming heirs often received the farm and the others sometimes received what was left. That mindset has shifted dramatically. In my recent experience, fairness is considered more than ever before.
Additionally, the large increases in the gift and estate tax exemptions we have seen in the last few years have eased some of the burden, or at least added some latitude for flexibility. For 2024, the gift and estate tax exemptions are $13.61 million ($27.22 million per married couple). Lifetime gifts that do not qualify for the annual exclusion will reduce the amount of exemptions available upon the farmer’s death. One thing that hasn’t changed, however, is the importance of determining a successor as part of the farm estate plan.
Choosing a Successor
It can be an emotionally charged process to determine a successor for any business. However, farming isn’t just a business – it’s a lifestyle. When farmers are choosing a successor, they are choosing a person to whom they’ll give or sell equipment, infrastructure, and sometimes land, if that’s what is best for their financial future. Often, the business has been in the family for generations, and the process can be very personal.
For the farm succession to be successful, owners need to ask themselves, “Is my business able to support a transition?” and “Can I sustain my lifestyle into retirement AND allow the business to transition?” The answer to that question requires careful case-by-case analysis. However, the earlier the owner engages in the planning process, the higher the likelihood that the answer will be “yes.”
You’ve worked hard to care for and build your farm, and you deserve the peace of mind of knowing that the business will continue for generations to come. Whenever you are ready to start your farm estate plan, our experienced advisors will be ready to assist you through every step of the transition.
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