Key Takeaways
- Planning to transition the family farm starts years before you want to retire.
- Understanding your farm’s finances is critical to enhance profitability before the transition.
- Successful planning requires defining key goals and making sure the parties involved understand the plan.
The average American farmer is getting older, which means retirement is on the minds of many at the helm of America’s 1.89 million farms.
From understanding your current financial statements and assets to identifying potential successors, planning for transition starts years before you exit. Critical decisions must be made to ensure the viability of your farm under new ownership and the achievement of your retirement goals.
Here are three areas you can work on today, even if your farm transition is years away.
Plant: Gaining Financial Clarity
The first thing to assess as you begin planning your family farm transition is your financial situation. With an accurate view of where you stand today, you’ll be better positioned to make decisions about tomorrow. We recommend gathering and reviewing these key metrics regularly:
- Available cash
- Outstanding payments owed to you
- Outstanding debts and payments you owe
- The value of your assets, including crops, equipment, and other items
- The difference between your earnings and expenses
There are a few documents that can help inform your succession planning process. Since discussing finances within a family setting can be sensitive, these documents are crucial for productive conversations.
Ideally, you’ll have three to five years of accurate insight in the form of these critical documents:
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Farm Net Worth Statement
Also called the balance sheet, the farm net worth statement tracks business assets against debts and liabilities.
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Farm Net Income Statement
The income statement provides valuable insights into the farm’s performance. This document should include trends in income and expenses over several years.
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Personal Net Worth
Include any assets that you keep separate from the farm business. Personal savings, investments, retirement, household goods, and real estate not associated with the farm can all flow into this document.
Cultivate: Estate Planning Considerations
Another important facet of succession planning involves estate and wealth planning, including considerations like gift and estate tax exemptions that allow family farmers to transfer wealth across generations without penalty. This strategic approach can decrease your taxable income as you move toward retirement and limit the volume of taxes your successor pays.
The annual gift tax exclusion is currently $18,000, while the 2024 lifetime exemption is $13.61 million. You also have the option to split gifts with your spouse, effectively doubling your exclusion.
A trusted advisor can help create a tax-efficient strategy for transferring wealth as part of your overall succession plan.
Other considerations of estate planning include:
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Portability:
This federal estate tax provision empowers a surviving spouse to leverage any remaining unused gift and estate tax exemptions after your death. Such a provision can shield your successors from the steep tax implications associated with estate succession after your passing.
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Lifetime Giving:
Whether through an irrevocable trust or outright gifts to successors, there are estate and gift tax techniques that can minimize the tax burden when assets are transferred to the next generation. A farmer can also gain income tax benefits using charitable techniques to defer income recognition with a charitable contribution of farm assets.
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Farmland Partnerships:
These offer a structured approach to defining assets, ownership, and profit sharing. They effectively avoid conflicts and provide clear resolutions for issues such as buying or selling land. A business valuation can help maximize your gifting dollars by taking advantage of discounts for lack of control and lack of marketability.
Harvest: Defining the Transition
Once you’ve gotten organized in terms of finances and estate planning, it’s time to develop your transition plan.
Transitioning the family farm is not just about passing on land and equipment — it's about preserving a legacy.
To ensure a seamless transition, focus on the following:
Keep a Positive Mindset:
There’s no one-size-fits-all approach for a family farm transition, so everyone involved must have a positive attitude coming into the process. Both existing and incoming owners should be on the same page regarding objectives and goals. Patience is also crucial, as this process typically spans two to five years or more.
Anticipate Challenges:
Be prepared for some bumps along the way, from emotional challenges to financial ones. For instance, navigating what and how to distribute to farming children versus non-farming children can be difficult. You must determine what is fair versus equal regarding your heirs and farm. These decisions are unique to your situation, but the right professional can provide an unbiased perspective that satisfies all parties.
Understand Retirement Cashflow Needs:
An essential part of transition planning is identifying your cashflow needs as you enter retirement. Strategic financial decisions, such as asset sales or debt management, can help secure this income.
Honor Your Goals:
It is pivotal to ensure that your goals and objectives are being met throughout the transition process. Start with the desired outcome in mind and work backward from there, identifying any gaps and developing strategies to fulfill your goals.
Ensuring the Success of Your Family Farm Today and Tomorrow
Planning for the next generation in your family farm business can feel overwhelming — especially if you don’t anticipate transitioning soon. However, it’s important to remember that succession plans can fail when you fail to prepare. It’s essential to seek the support of qualified professionals to help you make sound decisions for your farm’s future.
Key Considerations in Exit Planning
