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Published in Food/Agribusiness

Preparing for when the family farm must change hands

BY Sunday, March 31, 2019 10:13pm

Succession planning can be an emotionally-charged family affair for businesses in any industry.

That’s especially true for all sizes of family-owned farms, which make up more than 97 percent of the industry nationally, according to the U.S. Department of Agriculture.

Add in external factors like falling farm revenues, rising land values and uncertainty over international trade disputes, and it’s easy to have an already complex process become an even larger headache.

“The perfect plan doesn’t exist,” said Roger Betz, an educator in the farm business management program at the Michigan State University (MSU) College of Agriculture and Natural Resources. “There’s always trade-offs, compromises and adjustments.”

However, families can come close to the ideal succession plan if “the senior generation has enough money to live off of, everybody still gets along — is still having Christmas dinners together and still respects each other — and the next generation has a foothold to get off and going,” Betz told MiBiz.

The most important and unique aspect of succession planning that family farmers grapple with is communication, said attorney Dean Reisner, a partner at Grand Rapids-based Varnum LLP who specializes in succession planning and agricultural law.

“I think people struggle with talking about what they’re worth, what their income is, even not telling the kids what some of their assets are,” he said. “For a successful succession plan, you really have to communicate with the members of the next generation, whether they are farm kids or non-farm kids.”

Transitions can be difficult, often because they are timed around the death of a family member or result in contention or disagreement, so the importance lies in planning ahead, according to Reisner.

“Farmers tend to wait too long to start the process,” he said. “One thing that I really stress to people is to start having those discussions now. Talk to your lawyer, talk to your accountant, talk to your farm lender. They all have different experiences and know different things about your farm, but start that process.”

Structure matters

One significant way to financially prepare for family succession is a restructuring of the company or entities, especially if more than one descendant stands to inherit all or a portion of the land or business, according to Reisner.

“We’ll look at perhaps having an operating entity for the farm and one or more entities that own the land, depending upon whether we want to have non-farm kids own some of the land entity going forward,” he said. “And that, I think, tends to be a little scary proposition because the farm might have been structured one way for the entire lifetime of the first generation.”

Chad Zagar, managing director of tax and accounting for East Lansing-based GreenStone Farm Credit Services, told MiBiz that a sense of fairness among siblings — splitting the inheritance among the children as opposed to only “the oldest son, or the strongest son, or the child that has the most interest” in continuing the farming business — is much more common now than in the past.

While this tactic has the benefit of being more socially conscious, it can become a somber issue as farms try to get bigger and leaner as a way to manage their cost structures, according to Zagar.

“You could take a farm that is debt free and split it up to three different children and give an equal amount, and only one is going to work the farm and own it going forward,” he said. “But that person and farm are going to take on an assumed debt to give the other two children their fair share — and maybe that doesn’t work. Maybe the individual who has a passion to farm is not being set up to be successful.”

At the heart of succession, whether for a family farm or any other business, is the sale of the interest, a lifetime gift, an inheritance at death, or a combination of all three.

“Depending on the financial condition of a farm, you’re going to make different decisions about how to pass it along and how to establish your will or your estate,” Zagar said. “But, you’ll still go through the same process.”

Timing the move

Lifetime exclusion gifts, the total amount that can be given away tax-free over the course of a person’s lifetime, do not have to be allocated in one lump sum. Spreading those gifts of assets or land across multiple years might be a smart way to begin transitioning ownership from one person to another, according to Reisner.

“Maybe at first, (the heirs) just own one or two percent of the farm, and gradually, as they continue to work on the farm, the percentage that they own increases through gifts,” he said. “You lose that flexibility if you don’t start that process now.”

When it comes to inheritance, exemptions for the estate tax — the amount paid to transfer property at death — have soared. In 2019, an estate tax filing is only needed when the combined gross assets and prior taxable gifts exceed $11.4 million — a threshold that is nearly $10 million higher than 15 years ago.

“Farms are very asset-intensive and a lot of farms will have a value of over that amount, but there’s also a lot of farms that have less than that value,” Zagar said. “Maybe there isn’t an issue from a tax planning standpoint that they need to consider to pass to the next generation, but that doesn’t mean that people don’t need to go through this same process and have conversations about how they feel and what they think is fair.”

A team of independent, qualified business consultants that includes attorneys, insurance agents, accountants and lenders can help farmers stay honest and goal-oriented regarding their business.

“It’s not my place to tell a client who should inherit the farm,” Reisner said. “They have to decide what they want to happen down the road. My job and the team’s job is to help them get there in the best way possible.”

Importance of communication

Part of Betz’s job is to “facilitate, communicate, identify” concrete issues like operations, management and margins, as well as family dynamics.

“Everybody says you should communicate, but what does that really mean? Get into the meat,” he said. “Give me something worthwhile to talk about, and then it’s a natural thing.”

Betz thinks training the next generation in operations, management, risks and timing is just as important as asset planning — maybe more so.

When farmers do put together a plan, too many prepare only for the transfer of ownership and tax implications, but financial planning is the “easy part,” said Betz, who has been working with family farms for 37 years.

“Farms are very complicated things,” he said. “People don’t realize all of the stuff that they do to run a business. Just standing around watching, you may learn how to fix things or how to grow crops, but you don’t understand working on other management functions.”

It could be especially necessary now, while farm debt is high and income is depressed, to prepare and set up the next generation for success.

“The numbers are so big now,” Betz said. “You can’t make a mistake because there are so many dollars involved and the margins are so much thinner.”

Although there are many variables that make the agricultural industry unique, succession planning is not simply an issue among family farms, according to a recent study from the Great Cities Institute at the University of Illinois-Chicago. The research found that three-quarters of all family-owned manufacturing companies in the region are operated by someone older than age 55, and of these companies, roughly half do not have a succession plan.

“It’s a topic that can’t be avoided,” Zagar said of succession planning. “The more time you spend on it and conversations you have around it and complete transparency in it, the better for the operation.”

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