Farming is a risky business with significant costs, and one of the most expensive mistakes is failing to plan or oversimplifying the transition of the farm. Transition planning often involves challenging topics like taxes, fair versus equal asset distribution, and unexpected family dynamics, which can stir emotions and tensions. While there’s no one-size-fits-all solution, proactive conversations and thorough preparation can ease the process and help families navigate these complexities more effectively.
At its core, successful transition planning boils down to clear, honest communication and planning ahead. When communicating across generations, consider addressing key issues early to build mutual understanding and ensure a smoother transition.
Income Stream
After the transition, how will the transferring generation maintain a secure income stream? Will this come from personal wealth, or a combination of personal wealth and farm income? Before reaching a solution, the “retiring” farmers need to honestly determine their living expenses apart from the farm.
Defining Roles
The upcoming generation needs to articulate how they want to be involved in the transition process and express their interest in discussing transition plans. The retiring generation must clearly define their role in the operation after “retirement.” For example, will the owner transferring the operation step away entirely, stay involved in day-to-day operations, or only work during planting and harvest seasons? Discussing roles can prevent misunderstandings and unmet expectations after the transfer.
Explaining Future Growth and Ideas
The younger generation should consider how they plan to sustain and grow the operation. If their vision includes changes to traditional practices, they might benefit from drafting a business plan with financial projections to support their ideas—especially if the conversation about change could be tense.
Additional Key Questions to Consider
Transition discussions should address these topics:
Ownership Goals
How do the current owners want to stay involved in the business in the future?
Do they want to continue living on the farm?
Do they want to retain ownership of any land?
Will the operation (in whole or part) transfer within the family to the next generation (heirs)?
What Needs to Be Transferred?
Land: Current ownership, value, lease agreements, and liens.
Equipment: Value, ownership, and usage liens.
Management: Current decision-making processes, roles, and contacts for grain or livestock operations.
How Are Your Assets Titled?
Do you own the land personally, or does an LLC own it?
Do you jointly own equipment with a spouse or family member?
Understanding how assets are legally titled is crucial for minimizing risks during transition planning. Improperly titled assets can create obstacles in generational transitions or expose the farm business to legal or tax risks. Creating a detailed inventory of machinery, land, crops, livestock, and prepaid inputs is a great starting point.
Timeline
Does the current management/owner have enough savings for retirement?
What are the healthcare plans?
Are there deadlines that could affect new management/owners?
Transition Advisory Team
Bringing together a transition advisory team can help streamline the process. While each transition process is unique, the advisory team should include the following professionals:
A lawyer
An accountant
A lender
A business management advisor
These professionals can help achieve the current owners’ goals related to financial security for a surviving spouse and minimize taxes and fees associated with asset transfers. KCARD can assist Kentucky-based agricultural businesses by serving as a business management advisor.
Basic Steps to Get Started
Call a family meeting with those directly involved.
Create an advisory team that includes a lawyer, accountant, and banker.
Agree on business and ownership goals.
Create a list of all assets and debts.
Gather key documents (e.g., wills, property deeds, stocks/bonds, bank notes).
Create and agree on a realistic timeline for the process from start to finish.
Implement the plan.
The University of Kentucky has created a series of publications to help with personal and business estate planning. Part One, FCS5-420: Estate Planning: Getting Started, can be found here (uky.edu). The entire series is available on the Family & Consumer Sciences Extension website.
If you would like KCARD’s assistance with your agricultural business’s succession plan, contact us at (859) 550-3972 or kcard@kcard.info.