Tracy Frank, Published February 13 2014
Plan for retirement: Farm succession discussion crucial
The problem, Ferrell said, is that many farmers either don’t have transition plans in place or the plans they do have will not keep the farm in operation once they die.
“We’re at the point where we can’t afford to not talk about farm succession anymore,” Ferrell said during a Northwest Farm Managers Association meeting in Fargo last week.
Both estate plans and transition plans are needed to pass ag operations successfully from one generation to the next, he said.
But more than half of all adults have no estate plan in place.
“If we as agriculturalists want to keep the farmland in the family, we’ve got some work to do,” Ferrell said.
Farmers don’t look at their land and equipment like investors, Ferrell said. They look at it as their legacy.
As farmers age and refuse to give up any control of the farm, they aren’t typically as productive, Ferrell said. So by the time they do turn over control to the next generation, that generation is often ready to retire themselves, and there’s a lot of inexperience in the third generation.
Farmers are doing pretty well, he noted, adding that the average net worth of 2011 U.S. farm households was $1,011,309. But their assets are tied up in a big non-liquid asset that most farmers aren’t willing to sell. Farm assets comprise 76 percent of net worth.
In a survey, most farmers said they should divide their estates evenly among all of their heirs, yet they also wanted to keep the farm together. Ferrell said the bequests should better match the recipients. Give those assets to an heir who intends to continue the farm.
“Equitable and equal do not mean the same thing,” he said, adding that if you give farm assets to non-farm heirs, they’re going to sell them.
“You’re looking at giving away the entirety of your legacy if you’re not willing to make a plan guaranteeing your assets go into the hands you want to hold them,” Ferrell said.
Ferrell told the story of farmer who had worked his whole life on his dad’s farm earning only a livable wage, but his dad had told him, “Someday all this will be yours.”
When he died, it turned out the father had not made a will so the farm was divided equally among his farmer son and all of his non-farm children.
“I have seen very few sweat-equity arrangements that have actually panned out,” he said.
Instead of transferring all assets to the next generation, Ferrell suggests setting up an LLC, to which the farmer give control to the heir who works the farm by making that heir the CEO. Then, he said to make the off-farm heirs participants in the profits of the entity. An LLC operating agreement would determine how those profits are allocated, he said.
“We’re seeing more acceptance of business entities in farming and ranching,” Ferrell said, adding that farmers should discuss how to set up an LLC with their accountant, attorney, investment advisor and financial planner.
At the very least, he said on-farm heirs or their parents should take out life insurance policies so if the assets are divided equally, the on-farm heir can afford to buy out his siblings.
Donald Jarrett, an organic corn, soybean and wheat farmer from Britton, S.D., attended the Fargo meeting and said Ferrell covered a lot of good points.
Jarrett is 84 years old and has four kids, none of whom farm. He said he never wants to completely retire.
“If you’ve got a little something to do when you get up in the morning it helps you get going,” Jarrett said.
But he also said he does need to come up with a succession plan.
“It’s a problem of what’s the best thing to do,” he said. “I’ve been looking at it for a long time and should be doing something without question.”
Readers can reach Forum reporter Tracy Frank at (701) 241-5526