Plant, Cultivate, Harvest: 3 Keys to a Successful Family Farm Transition

May 11, 2021
family farm farming

Planning to transition the family farm starts years before you’re ready to retire. As with farming itself, you want to ensure you have everything in place to support a good season and reap a bountiful harvest.

In transition planning, this means lining up your financial statements, making determinations about the viability of the farm under the new ownership and ensuring the viability of your own retirement plan. You should also consider who you’re transitioning the farm to and how and make timely adjustments, sales and gifts to support your goals.

If you start early and work with professionals who understand the agricultural industry, you’ll be better able to attain your goals for the transition and your retirement. These professionals can guide you on the timing, measures and methods that will optimize your outcomes. They’ll make it seamless, helping you avoid risks and reap all of the benefits.

Here, we’ll lay out the three essential components of transitioning the family farm, including pertinent details and options to consider along the way.

1. Plant: Ensure You Have the Right Financial Resources

Your financials are the seeds with which you begin planning your transition process. With an accurate view of where you stand today, you can make determinations about how you’ll use key ratios in your financials to enhance profitability ahead of the transition and ensure viability. That way, you’ll enter lender meetings with confidence, ready to discuss next steps.

An Agribusiness Finance Specialist (AFS) can help you get organized and understand the best approach to financial restructuring for optimal profitability.

Other key aspects of this component of the transition include:

  • Determining the size and scope of the family farm
  • Determining how many heirs we can successfully transition to
  • Ensuring cash viability for both generations
  • Understanding the landlord mix
  • Gauging the readiness of the next generation

At Eide Bailly, we help clients put together detailed, accurate financials. In our financial analysis packets, we include industry standards as a reference point to help clients educate themselves on ratios, how they’re calculated and how their operations stack up.

Our packet includes but is not limited to:

  • Credit Presentation
  • Balance Sheet Trend
  • Earned Equity
  • Income Statement
  • Customized Ratios
  • Sensitivity Analysis
  • Core Equity Reserve
  • Break Even Spreadsheet
  • Indirect Expenses
  • Capital Debt Repayment Capacity
  • Crop Insurance
  • Marketing Tracking Form


A clear perspective on finances is critical for successful agricultural operations and transitions.

Watch our webinar recording on Agribusiness Finance Solutions.

*A note on accrual adjusted income statements:

We recommend using accrual adjusted income statements. The cash basis income statement only recognizes the income and expenses when they are receipted or paid for. Accruals account for changes from the beginning balance sheet to the ending balance sheet, with adjustments based on what actually happened. This way, you see true operations performance and get accurate, consistently dated market value balance sheets.

2. Cultivate: Optimize Your Family Farm Estate Plan

Estate and wealth planning are your means to nurture your goals for the transition. This planning clarifies the nuts and bolts of which specific options will optimize your financial outcomes and support your objectives as you approach that transition.

It’s best to work with a Wealth Transition Advisor who can help you make the most of your farm estate planning strategies. Our experienced Ag Producer advisors take a holistic approach to estate planning. Our goals are to:

  • Preserve your wealth and minimize your taxes using both lifetime and death planning tools
  • Ensure the attainment of your personal goals and your family dynamics match your business exit objectives, whether one lives or dies
  • Coordinate your business succession planning wishes with your estate plan

Essential considerations around family farm estate planning include:

The Current Estate Planning Environment

Currently, the Federal Gift Estate Tax Exemption for 2021 is $11.7 million at an estate and gift tax rate of 40%. It’s available for Gift, Estate and Generation Skipping Tax (GST). The 2021 Annual Exclusion is $15,000 per person. The IRS will not claw back the difference, or bonus amount, between that higher exemption of $11.7 million and the $6 million in 2026.

Because of the coronavirus pandemic, our planning world is much different than what we’ve had in the past. The current environment involves:

  • Suppressed values of a number of marketable securities for some family-owned businesses
  • Historically low interest rates
  • A government deficit and massive federal bailout and consideration of how our government will pay for that deficit
  • Concerns over asset protection and access to funds
  • Future adjustments to estate tax exemption

With all of this in play, now is the time to plan and work with your advisors. Ensure your documents provide for portability and flexibility with a change in the exemption. If you intend to use the higher exemption, consider setting yourself up to act if it looks like something will change. You might set up a trust for transferring assets or be prepared to break out and gift real estate holdings.


Portability can make planning more complex, but it may be the right move for you and it’s worth considering. With it, if you don’t use your exemption on your death, your personal representative could file an estate tax return and elect to make your exemption portable to the surviving spouse.

  • That $11.5 million won’t be lost or adjusted at sunset or for inflation
  • Any gifts that a spouse makes in that time period must come from your exemption first
  • The exemption is only available to the spouse as long as they don’t remarry

Established Plans

Many mid-size estate plans may now be out of date. If your current planning technique is Credit Trust/Marital Trust or Family Trust/Marital Trust, consider a more flexible option that gives beneficiaries a chance to have a second step-up, like a Disclaimer Trust or Qualified Terminable Interest Property Trust (QTIP).

As you plan, don’t neglect to run the numbers. We use a simple flow chart that factors for total assets, tax on the first death, how it passes on the first death and what the tax is on the second.

Charitable Giving

Charitable planning has many advantages for farmers, and there are several options available:

  • CARES Act charitable deductions: You can make a $300 deduction beginning in 2020 even if you don’t itemize.
  • Charitable gift of farm commodities: Donating farm commodities or raised livestock to charity and having the charity sell those assets may result in both an income tax savings and a self-employment tax savings because the charity doesn’t pay tax.
  • Charitable gift of farm machinery: If you gift farm machinery to a Charitable Remainder Trust (CRT), the Trustee of the Trust sells the property and pays annuity to the grantor over a term of years or for life. Thus, cash flow in the trust is generated from the sale of the machinery, and the grantor is able to stretch out recapture over years instead of all in one year.

Life Insurance

Life insurance is an invaluable element of a well-rounded estate plan. You can use it for liquidity to pay estate taxes or debts, for the purchase of the farm property by the farming children, or for distribution to off-farm children. If you own the life insurance policy and control who benefits from it, it’s includable in your estate for estate tax purposes.

If you have your life insurance policy owned in an Irrevocable Life Insurance Trust (ILIT), that policy is out of your estate. If you create a trust, and the trustee purchases the life insurance policy, it’s not taxed on your estate tax return. You could give cash to the trust, so the trustee has the ability to purchase the payment and use your annual exclusions to cover those premium payments.

Farmland Partnership

Farmland partnerships work very well to maintain the successor’s operation. Many times, to be a viable farm, the farmland must be available for the farming children to farm. You could put restrictions on that farmland in the partnership, giving a family member first right to farm. In a farmland partnership, farming children can operate it and non-farming children can benefit from it; for example, through land rented to the farm operation.

If you create the partnership, you can set the buy-sell provisions. This sets the tone to the family of what the parents’ intentions are for the farmland. You could also have discounts with tenants and common property.

Trusts, Loans and Refinancing

You might refinance your existing loans for lower interest rates or consider one of the following options:

  • Inter-Family Loans
  • Spousal Lifetime Access Trust (SLAT)
  • Intentionally Defective Grantor Trust (IDGT)
  • Defined Value Clauses

Farm vs. Off-Farm Children

Navigating what and how to distribute to farming children versus non-farming children can be challenging. You must determine what is fair versus equal in terms of your heirs and your farm. These decisions are unique to your situation, but the right professional can help you make determinations from an unbiased perspective that satisfy all parties. For instance, you could distribute your life insurance to off-farm children.

Watch our webinar recording on Estate Planning.

3. Harvest: Outline Your Farm Transition Plan

Once you’ve gotten organized in terms of finances and estate planning, it’s time to develop your transition plan. The keys to successful farm transition planning include:

✓ Great attitudes all around. Everyone involved should have a good attitude coming into the process. The existing and incoming owners should understand this process and have clear goals. There’s no one-size-fits-all, and this process will take time—anywhere from two to five years, or even longer. To be successful, you must create a well-defined plan tailored to your family and stick to it.

✓  Preparation for roadblocks. You are likely to come across a few bumps and barriers, from emotional challenges to financial ones. For instance, you must be prepared to pay income tax regardless and to ensure your plan supports viable farming operations and your retirement.

✓ Establishment of retirement cashflow needs. An important part of transition planning is identifying the cashflow needs for the first generation as they enter retirement and making financial determinations to ensure cashflow, such as selling assets or paying off debt.

✓ Assurance of owner objectives. Making sure owner objectives are met is also important. We typically start with the end goal and build backward from there, identifying the holes and how we can fill them in to make the objectives attainable.

✓ Determination of transition method. Work with your consultant to determine how you’ll approach transition: sole proprietorship, general partnership, corporation or family limited partnership?

✓ Coordination of farm transition and estate planning. The first and second generation should have their wills updated in case of a premature death. And you, the owner, must make sure your wishes are communicated to family members. Additionally, part of this step is determining how you’ll deal with farming vs. non-farming children.

✓ Strengthening of financial wellness. The income tax perspective really drives financial wellness. What does your balance sheet look like? Bank debt plays a key role in some of the strategies you can use to transition. Do you need to sell machinery or deferred crops to the second generation to make retirement work?

✓ Choosing the appropriate tax planning strategy. Your accountant can help you determine the best route to tax planning. They’ll help you understand your options for farm income averaging, retirement plans and charitable remainder trust.

There is a great deal to understand about the intricacies of farm transition. Working with knowledgeable and experienced agricultural advisors will help ensure you make the best decision for your family’s farm.

Importance of Proactive Transition Planning

When planning for the future of your family farm, each stage of the transition process is important:

  • Plant – Ensure You Have the Right Financial Resources
  • Cultivate – Optimize Your Family Farm Estate Plan
  • Harvest - Outline Your Farm Transition Plan

Having the necessary plans in place and having essential conversations with your family and farm colleagues well in advance of your transition, along with having the right advisors on your team to help guide the transition, will assure peace of mind in the long run.

Watch our webinar recording on Transition Planning.

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