Farm succession requires more than good intentions

Dana Erickson

Each year, thousands of American farm families wrestle with the task of passing the farm to future generations. A lot is at stake in this delicate handoff, including income and security for the senior generation, control and authority for the younger generation, fairness and equity for non-farming family members, and, of course, dealing with the government’s “tax bite.”

Planning for the transfer of one’s farm from one generation to the next can be aided by following some very practical steps.


Start the conversation

If you’re the farm owner, sit down with your spouse and children to tell them of your desire to pass the farm to the next generation. Listen to their thoughts about farm operations and succession. Which child or children have an interest in operating the farm? Discuss your preliminary thoughts about releasing authority to them for farm operations.

Talk through possible timeframes for the transfer to take place. If more than one child wants to operate the farm, discuss your thoughts about the farm supporting multiple families. Exchange ideas about a transition that treats everyone equitably.

You owe it to your loved ones to address this subject in advance of a potential crisis caused by death or disability. Don’t delay this conversation.


Consider retirement, not just succession.

While many farm families have a plan in place to pass the farm to the younger generation in the event of the farm owner’s death, too few farmers have adequately planned for a retirement.

Financial services professionals can assist seniors in preparing for their golden years by helping farm families analyze potential sources of retirement income, eligibility for Social Security benefits, adequacy of life and health insurance coverages, and investment allocations, among others.


Beware of debt and taxes

Giving the next generation of farm owners the ability to operate the farm without saddling them with excessive debt is essential. It does little good to leave your loved ones with the farm only to see them forced to sell it in whole or in parts to pay off existing debt.

Perhaps no tool is more valuable in preserving the farm for succeeding generations than life insurance. Under current tax laws, life insurance death benefits are generally income tax free, and families can use proceeds to pay taxes or expenses at the time of the insured’s death. In addition, proceeds from life insurance can be a ready source of cash to equalize the distribution of the estate to adult children who have no interest in operating the farm.

In 2010, federal estate taxes are repealed. The couple could transfer all of their assets to their children free of federal estate tax.  In 2011, absent legislative changes, the amount exempt from federal estate tax upon transfer (to someone other than a spouse, including money and property) at death returns to $1 million. With a proper financial strategy in place, a couple could transfer (at their deaths) $2 million in money and property in 2011 without incurring federal estate taxes. If the transfer is made while the farm owner is alive, the federal gift tax lifetime exemption is $1 million ($2 million for a couple). A gift in excess of the $1 million federal gift exemption in 2010 is taxed at 35 percent. In 2011, a gift of property by an individual to someone other than a spouse, either during lifetime or at death (in excess of the exemptions identified above) could result in either a federal gift tax or a federal estate tax liability. These taxes could be as high as 55 percent of the additional amounts transferred.  In addition, there could bestate gift and state death taxes that need to be considered as well. A financial-services professional can help explain applicable taxes.

For many farm owners, a combination of life insurance and trusts may help establish equity among children, provide income for the owners and facilitate the transfer of a farm property to the next generation.


Work with trusted advisors to build, execute succession plan

In building a farm succession plan for your family, work with a collaboration of experienced professionals:  an attorney, capable of establishing proper wills, trusts and durable power of attorney; an accountant, familiar with farm and tax issues; and a financial services professional experienced in estate strategies. Together, this group of professionals can work to develop a farm succession plan that keeps the family farm in the family.

Passing the family farm to the next generation may not be easy, but it surely is rewarding. Don’t delay in developing a farm succession plan to secure your and your family’s future.


Dana Erickson, ChFC,CASL is a financial consultant with Thrivent Financial for Lutherans in Stillwater. She can be reached at 651-439-7091.