Farmland is an important asset that should not be forgotten during estate or business planning. Even if farms will be passed down to future generations, estate planning should ensure that the parents are well taken care of for the remainder of their lives; provide for distribution of assets to descendants or other groups, individuals, or charities.
Farm succession planning is a growing concern as many farms are becoming more financially successful than before and there are multiple generations involved in family farms. Dr. Neil E. Harl, J.D. Ph.D. has developed 7 factors that are important for farm succession planning. They include:
1) The ability and willingness to build a management team– Sometimes a farm cannot continue to operate because the younger generation lacks management skills. It is ideal for older generations to train the younger ones so that management can be mastered before the death of the older generation.
2) The “power” issue– Since most farms are family owned, there needs to be a checks and balances in place to prevent power and control disagreements.
3) Assuring fair compensation as a fundamental part of a succession plan-Dr. Harl stresses that each family member participating in the farm be compensated fairly and regularly. This prevents arguments later on if someone is under-compensated originally and then given a greater portion at a later time.
4) Anticipating disruptions– the biggest disruption is divorce, especially among the parent generation. (Which is why I should be hired to draft prenups and postnups!!)
5) Valuing ownership interests and provisions for deferred payment-there are many different valuation methods; valuation is particularly important for buy-outs.
6) Protecting minority owners– Dr. Harl set forth ways to ensure that minority shareholders feel protected. This is important for both estate and business planning.
7) Encouraging phased retirement– Many times older people need to be encouraged to retire when their practices are holding back the developing business, especially when there is significant change in the business’s needs. Dr. Harl recommends a great way to do this is to present older members with the title “emeritus” after their position.
It’s never too early to talk about farm succession planning. I think it should be a lifelong conversation that every farm family should talk about.