Family Farm Succession Strategies: Planning for the Next Generation

Many farmers want to ensure their land stays dedicated to agriculture — and ideally within their family — when it comes time to retire. However, very few of those nearing retirement have concrete plans in place that articulate who their successor will be and how the land, equipment, business, and other assets will be passed on.

percentage of farmers with succession plans in place

Generational planning is the strategic process of preparing to transfer ownership, management, and assets from generation to generation. It is a critical aspect of long-term continuity for farms, helping to successfully transition operations to the next generation while preserving family values, legacy, and the viability of the business.

Challenges in Generational Planning

For many families, the farm is more than just a business — it’s a way of life. This emotional attachment can make it difficult for the older generation to let go and the younger generation to make changes. Add in family dynamics, business intricacies, and an evolving agribusiness landscape, and generational planning becomes increasingly complex.

As of 2022, 97% of U.S. farms are owned and operated by families.

Understanding the potential challenges involved in generational planning is crucial for developing effective strategies to overcome them and ensuring a smooth transition.

Valuation and Financing

Accurately assessing the value of land, equipment, livestock, and other farm assets can be complex. This is particularly true for farms with significant land holdings or specialized equipment, which can be difficult to appraise accurately.

The farm itself represents a substantial physical asset that is typically illiquid and largely indivisible, often making up a significant portion of the family's total wealth. Without careful planning for retirement and estate transfer, families may face financial instability, familial disputes, and unexpected capital losses.

Debt Management

Many farms carry substantial debt. Transferring this debt to the next generation while ensuring financial stability for both retiring and incoming family members can be difficult.

Tax Implications

The transfer of farm ownership can trigger significant tax liabilities, including estate and capital gains taxes. Proper planning is essential to minimize these financial burdens and promotes the farm’s long-term viability.

Active vs. Non-Active Members

One of the significant challenges in generational planning is managing the differing roles of family members. Active family members who work on the farm may feel entitled to a larger share of ownership or profits, while non-active members might expect an equitable distribution of assets without direct involvement in the farm’s operations.

Devin Hecht, Eide Bailly's Wealth Transition Services Practice Leader, dives deeper into how farmers can build successful succession plans in this recent podcast episode.

Transition Methods: Gifting vs. Selling

When planning for the future of your ag operation, deciding between gifting and selling the farm is a crucial part of the succession planning process. Each approach must be weighed carefully to create the best outcome for your family's legacy and financial well-being.

Gifting the Farm

One of the primary advantages of gifting the farm is the potential tax benefits. Under current estate tax laws, individuals can gift a certain amount of assets yearly without incurring gift taxes. The lifetime gift tax exemption also allows for the transfer of significant wealth without immediate tax consequences.

Gifting allows you to pass ownership to the next generation gradually, ensuring they are well-prepared to manage the farm.

However, it's important to note that gifting will not provide the stepped-up basis benefit. If the farm is gifted during your lifetime, your heirs could face higher capital gains taxes when they eventually sell the property, as opposed to inheriting it at a stepped-up basis to the fair market value.

Gifting the farm also does not provide immediate financial compensation to the retiring generation. This can be a drawback if the retiring individuals rely on the sale proceeds for their retirement plans.

Selling the Farm

Selling the farm provides immediate financial compensation to the retiring generation. This can be essential for funding retirement, paying debts, or investing in other ventures.

The selling process also involves a clear farm valuation, which can help establish a fair market value. Proceeds from the sale can be distributed more evenly among heirs, which can help avoid disputes over the value and management of the farm. This is especially useful in families where not all heirs are interested in or capable of managing a farming operation.

However, selling the farm can trigger significant tax liabilities, including capital gains taxes. Proper planning and consultation with tax professionals are essential to minimize these financial burdens.

Emerging Succession Trends for Ag Producers

Conservation Easements

Landowners can voluntarily limit the development or use of their property to protect its environmental or cultural values through conservation easements. These legal agreements ensure that the land remains available for agriculture, preserving the family’s farming legacy and preventing future development or non-agricultural use.

Conservation easements usually involve some form of payout, with a potential donation portion. The donation portion can provide a significant income tax deduction, as the value of the easement is deductible. Additionally, the sale aspect can provide cash to the landowner for redemptions or debt management without losing the use of the underlying property.

By reducing the property’s market value, a conservation easement can lower estate taxes. This can be especially beneficial for large estates that would otherwise face significant estate tax liabilities.

Increased Investor Interest

Investors are recognizing the value of farmland as a stable and appreciating asset. At the same time, farmers increasingly view their land as a strategic asset that can be leveraged to secure financial stability and support retirement plans.

Selling the farm to investors can provide immediate liquidity, which can be used to fund retirement.

This shift in perspective is driving the popularity of selling to investors.

Navigate the Future of Your Farm with Confidence

A comprehensive and flexible succession plan allows you to minimize tax liability, provide financial security to family members, enjoy retirement, and protect your legacy. At Eide Bailly, we understand the intricacies of the agribusiness industry, and we’re here to support you and your succession goals.