Three Parts to a Farm Plan: And you need all three

The Estate Plan

(Courtesy: U.S. Department of Agriculture)

To start with, let’s recognize that everyone has an estate plan. Although it may not be the plan we want, all assets have a distribution method tied to them. I call them the Estate Planning COPs.

Contract

"C" is for contract and is the first way assets are distributed. Contracts can be found in any policies or accounts that have a beneficiary tied to them. Items like life insurance policies or retirement accounts have a beneficiary designation. This designation is a contract that will involve distributing these assets to the selected beneficiary as the first step in asset distribution. 

This may affect a farm operation if a life insurance policy was bought to help a returning heir buy the farm from their siblings or pay off existing debt. Or, if the funds from a retirement or investment account are supposed to go to the non-farming heirs.

The good news is that the beneficiary documents can be easily updated to accomplish the goals of the family.

Ownership

Ownership is the second step in asset distribution. Any asset with a title has a transfer distribution plan. Titles can represent ownership transfer between joint owners or indicate ownership by a trust or a business entity.

Careful use of titles should be part of the estate plan. Mistitling of bank accounts can lead to the misdistribution of the assets at the death of the owner.

For example, a child may be added to an account as a signer. But, if done incorrectly, and the paperwork says they are an owner, any cash left in those accounts would go to that child.

Additionally, using transfer on death, or TOD designations, makes that person an owner of the asset. This opens the asset up to issues in the case of divorce, bankruptcy, some types of disagreements, or any lawsuits brought against the other owner.

Given these examples, titles must be reviewed for accuracy to ensure they are appropriately managed as part of the estate plan.

Probate

The final distribution method is probate. Probate is a legal proceeding that occurs before a judge to finalize the estate.

Probate basically occurs in two instances: if you die with a will or without a will.

The catch is what happens during those two options. If you pass away without a will, it is called dying intestate. And in this case, assets are distributed to your heirs, but without any direction from you or regard to your wishes. Generally, all assets will be divided equally among the surviving heirs. This may lead to the sale of these assets, as we need to define what "equal" means, and this is the only way to ensure everyone receives their equal distribution.

The other way is to have a will that lists who receives each asset. When used in combination with updated and correctly designated beneficiaries on life insurance policies and other accounts, correctly titled assets, what remains is usually personal property or other non-farm related items.

If you have a list of personal items that you want distributed to specific individuals, it should be included with your will. This list could include jewelry, collector items, personal vehicles, and family heirlooms. 

The Transition Plan

(Courtesy: USDA NRCS South Dakota, CC BY-SA 2.0)

The living part of the transition plan is often overlooked when we decide that the next generation will return to the farm. This part of the plan includes decisions on when the heir will return to the farm, where they will live, how they will be paid, and what kind of extras they will receive. 

Benefits like health insurance and retirement accounts can be part of the plan. Additionally, the plan may include perks such as mom making dinner, a quarter of beef in the fall, the farm covering the purchase or upkeep of a house, and a vehicle for both personal and work use.

The discussion on workload expectations is in this transition plan. And it needs to be written out and discussed so everyone understands goals, components, and timeline.

Bringing the next generation back to the operation is usually looked at from a workforce standpoint, “we will get so much more done with another body on the farm.” However, management transition is also important, as many farmers and ranchers do not easily give up control of the farm or ranch that they've been operating.

Decision-making authority becomes an issue when the next generation feels they have no input and are treated as nothing more than hired hands. Other times, the older generation feels like their experience isn't respected because the child wants all the authority and decision-making components. Communication and empathy are essential skills needed for the succession process.

Another area of contention arises when timelines for the transition are developed but not followed. The decision on how long each family works together will require communication about the expectations of both generations and the current health situation of each member involved. This situation may be due to upgraded machinery, which makes farming easier with new equipment and innovative technology, or a change to the livestock operation that makes chores more manageable. 

Responsibility for the farm’s financial situation is another component of the transition plan. The transfer of the business side: insurance, loans, bill paying, economic analysis, and marketing, is another step the operation needs to plan for.   

The transition of ownership is the last conversation related to the transition plan. Will ownership occur during the owner's lifetime or upon their death? There are various methods and timelines for the ownership transition to occur. The tools used to transfer ownership will depend on the family's goals.

First and foremost, and often talked about, are the tax consequences that we need to consider, including capital gains, estate taxes, gift taxes, stepped-up basis, income tax, and other considerations.

Income sources during and after the transition for all involved families need to be discussed and planned for, as they will affect the transition plan, as well as the third (and often overlooked) plan, mainly because farmers and ranchers consider retirement a taboo topic.

The Retirement Plan

(Courtesy: Preston Keres, U.S. Department of Agriculture)

The retirement plan allocates resources to support the older generation's daily living expenses without affecting the farm's financial situation. 

However, funding, health, and living considerations of this plan are essential for a successful transition and estate plan to occur.

Many times, retirement isn't considered because “I'm going to die in the tractor seat (or saddle).”

However, as life expectancy continues to climb, this aspect of the plan becomes an increasingly critical need. As farmers age, they may struggle to participate in the farm's daily activities. And with most of the farm's income being reinvested directly back into the operation, decisions need to be made that provide income streams for the farm and farming heir, as well as the retired generation.

Income from the farm for the older generation, including rental income, self-funded retirement accounts, Social Security, and other sources, could be used to cover living expenses. 

Another consideration is healthcare needs, including long-term care needs. This is a big concern for many farm and ranch families, as long-term care expenses can run from $10,000 to $12,000 a month. Narrow profit margins on the farm make those additional expenses a substantial financial obligation and burden on the family farm that can be financially draining. Products like long-term care insurance, Medicare, Medicaid, and health insurance are all part of this conversation.

The use or non-use of these products will help direct the need for retirement fund planning and drive ownership decisions.

A third consideration for the retirement plan is the future living location for all family members. Will the older generation move off the farm to make way for the next generation to live near the cattle facilities or grain bins? Or will another house be built for the child returning to the farm operation?

As the older generation decides whether to age in place, their decision may be influenced by the needs of the farmhouse. Does the old farmhouse need to be adapted so the door frames can accommodate walkers and wheelchairs? Does the bathroom have a shower that's accessible when walkers and wheelchairs are required? Again, funds needed for any of these decisions also need to be part of the planning process.

While many farmers are not planning to retire, it is essential to accept this as a probable situation so that the third step and this third piece of the Farm Plan can be fully accomplished and worked through.

Working Together

Like a good milking stool, the farm plan has three critical components. Families need to consider all three as they develop their farm plan. Leaving one out or not following through on one can impact the success of the plan, the future of the farm or ranch, and the family.