Effective Farm Succession Planning
by Arthur Littlefield, MBA
Farm Succession and Estate Planning Specialist
Lincoln Financial Advisors Agribusiness Services
Farmers invest significant amounts of time, energy, effort, and money to make their farms successful. Quite often, due to the demands of field work, planting, spraying, harvest, equipment maintenance, etc., planning for succession is a low priority. All too frequently the memory is that, although there were some challenging times, everything eventually worked out OK when dad or grandpadidn’t have a plan or a firm understanding with the family in place. But there may be a time whenan unexpected change in the farm’s leadership is caused by an illness, accident, disability, demands of the next generation, family dynamics, death, etc.
According to the Family Business Alliance, more than 30% of all family-owned businesses survive into the second generation. Twelve percent make it into the third generation. Only 3% of family businesses are operating by the fourth generation and beyond.1
The best course of action is likely to be talking with your children, both on and off the farm, and tell them your succession plans. The result can provide a source of financial security for the family and is expected to be better than selling the ground and equipment to a third party. In addition, the all-important family dynamics will hopefully be addressed while mom and dad are still alive. The last thing they want to see is a family torn apart.
Regardless of which course you select, there are steps you can take that will ease your family’s transition.
- Work with your children. Who is best able to run the farm? If you are like most farmers, your children began riding on the tractor in grandpa’s lap and then workingon and around the farm with the family. If not, you may have had a hired hand for many years who is qualified and deserving of the opportunity to take over and buy the ground, operation, and equipment over time from mom, dad, and the children.
- Determine a value for the ground, equipment, and farming operation. This is no different than what you do every time you buy a farm or a used piece ofequipment.
- A written agreement may or may not be advisable. It is unlikely you will want tohave your child(ren) sign an agreement. However, as you approach retirement and are selling to a non-family member, it may be advisable to have a written agreement which could give you some comfort regarding your retirement cashflow. Depending on the structure of the ownership, this document will be a binding agreement detailing the terms of ownership transfer between you and your offspring, you and a non-family successor,or you and your partners. Be sure to specify how the agreement will be funded. Options may include a loan from a bank or company earnings that are paid as part of an ‘earn-out’ arrangement with the successor that require regular installments. Proceeds from a life insurance policy can also be used as a means to fund a buy-sell arrangement.
Planning for succession can be important in order to maintain the family’s multi-generational legacy or to avoid an unpleasant task if all family members have left the farm. You’ll have a lot more options if you start to plan when things are going well. You may also want to think of reserving the opportunity for your grandchildren to return or stay on the farm. What you don’t want is a situation where your family is scrambling to salvage some value from the family farm after you are gone.
1 - Family Business Alliances, “Cited stats”, Accessed April 2020.
Lincoln Financial Advisors Agribusiness Services. 1212 Banbury Circle, Naperville, IL 60540. Art Littlefield is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. CRN-3043654-041520