Your farm or ranch is more than a business, or even a way of life—it’s your legacy, something that may have been in your family for generations. You want that to continue, so one day your grandchildren can walk the land their great-grandparents did, and take the same satisfaction in knowing what they do every day is a vital part of our economy.
But farm succession planning is not an easy task. Land, equipment, equity, your own retirement—how do you even begin to think about handing your business over to the next generation? You’ll need a team of professionals, including your insurance agent. But to help you get started here are a few things to consider when handing off a farm or ranch to the next generation.
Succession Planning for Farmers
To develop an effective farm succession planning strategy, you need defined goals. What is your intention when you transfer the family farm to the next generation? You will need to have clearly-defined roles for your successor(s) as well as those who have a vested interest in the transfer but may not be working on the farm. Division of assets can be an emotionally fraught subject, so the more time you have to plan and set up expectations for your family, the better off you—and they—will be.
Every family situation is different, and in the interest of the overall health and success of your agricultural operation, the best thing you can do is take a step back and look at your succession goals as critically and unemotionally as possible. Ask yourself these questions:
Would your successor(s) be as committed to the land and family business as you are?
- Are they in it for the long haul?
- When the time comes, will you be ready to share control and management decisions?
The best business decision could be difficult for some members of the family, but keeping the business at the center of your decision-making can help ensure the continued success of your farm or ranch operation.
You know your operation has a lot of moving parts, so transferring ownership is an important step of your farm succession plan. Some things to considering when transferring your farm or ranch to your successor:
This can be dealt with in a variety of ways. It can be sold, either outright, in installments, or ownership can be transferred when the machine is traded. These all have tax implications, so you will want to consult with your tax advisor to decide which option will work best for you. Gifting machinery may help limit some income tax consequences, but could also result in a gift tax. Finally, the machinery can be leased to your successor, but you will have to determine beforehand who will pay for repairs.
Feed and Livestock
As with machinery, there are many ways to transfer ownership of feed and livestock. When dealing with breeding livestock, you may choose to sell a portion of your breeding herd to your successor. Payments can be made in installments, or you may choose a roll-over approach, where you continue to own the breeding herd, but you and your successor share joint ownership of the offspring.
Feed and market livestock can also be sold or given, and it’s up to you to decide when is the best time for that to happen, but many choose to transfer at the low point of the feed inventory (just before harvest), or between the sale and replacement of market livestock.
Instead of selling your successor an interest in your market livestock, the livestock can also be inventoried (you will receive the inventory value of the livestock when it’s sold, and the remaining proceeds will be divided between you and your successor). This can also have tax implications, so review carefully with your tax professional.
When creating a farm succession plan, consider how you would like to transfer ownership of your land. Land can be transferred during your lifetime by sale or gift, or upon your death. Sales make take place through cash or installment.
Gifting your land to your children can help with gift taxes, especially if you’re dividing it among several people; you can give up to $10,000 of property each year (to as many people as you’d like) without having to pay a gift tax.
However, gifting a property means that you are also giving up any right to ownership of that property – which means you may end up paying rent to your heirs.
Transferring upon death is the most common option for just such a reason, because it allows you to use the property and receive income from it all through retirement. Tax laws vary regarding inheritance; again, consulting with a tax professional is a very important step before making any land transfer decisions.
Where Can I Learn More About Farm Succession Planning?
By taking a look at your assets long before you’re ready to transfer ownership of your farm or ranch, you’re giving yourself time to choose the decision that’s best for your family. Transferring your farm or ranch property over to the next generation isn’t an easy task, but you’re not alone. And if you have more questions, your local Farm Bureau agent can help you with the process and ensure that your farm or ranch remains in your family for generations to come.
Iowa State University Extension Office