Farmers know a thing or two about balancing multiple demands. The continual upkeep and success of a farm relies on juggling a wide breadth of activities. From milking to supervising employees to staying on top of industry and consumer demands, dairy farmers have well-practiced the daily balancing act.
With an aging population of farmers, the talent of balancing demands can be useful in the farm office when planning business succession. Picture the farm five, 10 and 20 years from now. Who is running the show? What does the ownership structure look like? Is the business financially secure?
Mapping out the succession plan takes a lot of work and negotiation within the family—but it is a necessary process every farm will face eventually. To develop a suitable farm succession plan, all generations need to strike a balance and work together.
Goals for the Future
“There are a lot of moving parts to be considered in succession planning and family members—both junior and senior generations—need to follow-through when seeking a balance between goals,” Michigan State University Extension Senior Educator Roger Betz asserts. “Compromises are necessary to find something to work for the whole family.”
Betz recommends families preparing for succession should keep six key goals in mind—and work to find the ideal balance between each component.
- Financial Security for the Senior Generation. The older generation worked a lifetime on the farm and they often do not like risk. As such, their financial security is a top priority in the transition process.
- Family Harmony. Succession planning is a touchy subject and it is important family members get along and stay informed. For heirs who will not be returning to the farm, equitable alternatives to farm assets should be considered. However, Betz says sometimes what’s best for everyone is not what is fair or equal, but what needs to be done to ensure viability of the business.
- Opportunity for the Junior Generation. Consider what the future may hold for the next generation and try to do what needs to be done to keep the operation running and profitable.
- Flexibility. Plans need to be apt to move and change with potential challenges of the future. Succession planning should not be rigid, but take into account volatility of the market. Milk prices may drop, input prices may increase and the farm needs to be able to adapt.
- Simplicity. The succession plan should be relatively simple. Betz wants farmers to avoid confusion and stress in the family by avoiding a complicated plan that involves too many entities.
- Minimize Equity Loss Through Taxes. Federal income tax and state taxes incurred when transferring the farm can be a threat to the business. It is important to find mechanisms to diminish losses through taxes, but Betz reminds this is not the only goal families should consider when planning.
Communicating the Facts
“Whenever I think about farm succession, I am always reminded people don’t often communicate effectively and that hinders the entire process,” Betz stated.
Junior and senior generations have different concerns and it’s important everyone is on the same page. Betz finds senior generations do not want to talk about it, are afraid of losing flexibility and control and are not sure how to get started. The junior generation often wants to have the opportunity to get started, but are not sure if they are ready to assume responsibilities or how their parents feel. Through proper communication, many of these issues could be resolved.
“The most important way to be prepared is knowing the facts and to have all information about the farm available in a format easy to communicate between family members,” Betz recommends. “You need to have facts about your finances in black and white. Know your cash flow, incomes and where profits are going before you start planning succession.”
Protecting the Assets
Because of everything to be accounted for in succession planning, Betz says the plan should start as soon as there is some interest from either generation. In many cases, Betz finds the entire process can take 20 years to be completed. Slowly shifting responsibilities and maximizing each individual’s skill sets helps facilitate the process.
Part ownership of the business or assets can take place when the younger generation is in their late twenties to mid-thirties, according to Betz. This helps ease into the transition when the parents grow older and can sell or lease their remaining shares to the children. The continual process can be developed to enable an easier mechanism for succession.
“Dairy farmers have a beautiful asset: cows,” Betz said. “Cows are a built in engine, when transferred in the family, taxation rate stays at 15.3 percent for both buyer and seller. Cows provide long term capital gains and as such are good assets to sell at a low cost to the younger generation to spread out the income over time.”
When it comes to land, there are several options families can consider including using a trust where the farming generation can buy or rent the land at a reduced cost. This is suitable for heirs who are not currently working or do not plan to work on the farm. Betz said the children who chose to take on farming can rent or buy the land from the trust and the income is then shared among all heirs. Families can also use gifting as a strategic tool to help facilitate a transition plan and minimize equity loss from taxes. When considering taxation, there are many options to facilitate succession for families.
Keys to Success
Betz has watched while many families have undergone succession, over the years has discovered three key ways to be successful, which include: a willingness to discuss among family members, patience during the process and utilizing outside assistance such as MSU Extension, attorneys and accountants.
This also involves another balance in the farm office. There are three outside players a family may call upon in the process: their lenders, their attorney and their tax planner or certified public accountant. All must remain on the same page with the same goals in mind. Communication is the key and it’s important to start planning early for outside entities and families alike.
“It’s a beautiful thing when the generations can work together and develop a plan that works for the whole family,” Betz asserts.
This article originally appeared in the September 2015 issue of the Michigan Milk Messenger.