Protecting a legacy
Farmers and ranchers must plan for the next generation
According to the U.S. Department of Labor, the average age of farmers and ranchers is 55.9 years, putting them among America’s oldest workers. The impending retirement within this demographic leads the way for a new generation of agriculture professionals to take over a primary sector of the U.S. economy. Farming and ranching families faced with identifying who will operate the business next may want to consider working with a wealth management professional for many reasons. Among the most important is to facilitate a succession plan that preserves the legacy of the operation that has been maintained for so many years.
Considerations about the tax consequences associated with the land, livestock and equipment are unlike any other business – even down to the management style of the farm or ranch, which can have a large impact on the valuation of the entire operation. A phased and thorough approach includes an inventory of assets, identifying the vision or goals of the farm/ranch, structuring the estate plan and taking action by carrying out the established plan.
Phase 1: Inventory and assessment
The initial step to completing a succession plan is compiling an inventory of assets. To establish a net worth of the entire operation, a list of key people, equipment and livestock need to be recorded. “Key people” includes anyone who keeps the business running, whether it is family members with management responsibilities or outside partnerships. Also, it is important to identify all potential beneficiaries who would be entitled to proceeds if the business were to be sold. It can seem daunting to undertake, but a comprehensive inventory of all equipment, livestock and relevant documentation, like deeds, should be made. Additionally, it will be necessary to include a list of personal assets, like retirement accounts, which can have an impact on the liquidity of the overall assets and tax effects.
Phase 2: Identify goals
Although sometimes difficult, an established plan to communicate the goals and vision of the operation is critical. The entire family should be included in these conversations, even those who have no intention of running the farm or ranch in the future. Answering crucial questions such as, “What do we want to see this operation look like in five, 10 or 15 years,” is necessary.
It may help to call a meeting where everyone can voice his or her needs and expectations, and each can be addressed. Together, family and business goals are crafted with these needs in mind and the goals should then inform the plan’s details. The succession strategy should include naming a successor or successors who lead operations, deciding which assets to liquidate, transferring value as either ownership shares or monetary settlements, and how to treat equipment. Open communication and intentional dialogue must be treated as a critical component of a successful transfer strategy.
Phase 3: Develop the tools
Proper estate planning provides clear direction on how to control property and assets during the owner’s life, and extends that control if the owner is disabled. After death, the succession plan guides fulfillment of the owner’s vision for the land and operation, and takes care of loved ones. It is important to consider all aspects of personal and business wealth encompassed in the estate plan, including retirement income, estate taxes, asset distribution, business funding and any potential fees or taxes related to ownership transfers. For instance, not all farm assets are appropriate for inheritance, like fully- depreciated equipment, which is stepped up to full market value once inherited. On the other hand, harvested grain can be sold at market value by heirs without incurring income tax. These intricacies are why a comprehensive and detailed succession plan is a must for agricultural business owners.
Phase 4: Follow through
Once the estate planning tools have been identified, it’s much easier to carry out the succession plan when the timing is right. It will be necessary to make sure that, even if the plan is years away from being executed, assets are titled properly. When equipment is added or sold, or when beneficiaries or management change, remember to retitle the assets and consult with a wealth advisor. This can be the difference between leaving a gift and establishing a legacy. Wealth advisors can not only assist in explaining the estate plan structure, but also in facilitating the conversation about the strategy—particularly, why the plan is built the way it is.
For any business owner, inaction is an action that can hold undesired consequences. A phased and thoughtful succession plan provides long-lasting protection of the assets they have built, which can continue to grow for future generations.