Articulating a vision for the future of a farm isn’t generally high on a farmer’s list of things to worry with. However, an Alabama Cooperative Extension System visiting professor said succession planning is an aspect of operation management producers should think about carefully in advance of retirement plans.
Transition is Inevitable
Robert Tufts, who is also a tax attorney, said farmers should recognize that transition is going to occur, whether there is a plan for it or not.
“Broadly speaking, there is a financial component,” Tufts said. “How much income will be available to the retiring farmer or the surviving spouse. There is also a management component: who will manage the farm and what will the business structure look like?”
Finally, Tufts said there is an estate planning component—including the documents needed to initiate the transition.
Financial Aspects
There are several factors that impact the financial aspects of succession planning.
“The first decision is when,” Tufts said. “That is usually dependent on the lifestyle expectation of the retired farmer and will depend on the available income. I know some farmers plan to die with their boots on, but often there is a surviving spouse or children who need continuing income.”
Social security benefits are another factor for producers to consider. Problems arise when farmers don’t have the minimum 40 work credits to qualify for social security. Individuals can earn four credits per year to add up to the 40 work credits required to earn social security. In 2021, producers need to have $5,880 of taxable income.
Management Aspects
In addition to financial considerations, farmers will have to take great care to make plans for operation management in the event of retirement or death.
Tufts recommends a family meeting—or several meetings—to discuss the farmer’s vision for the future. Ideally, the farmer would get buy-in from the children, but there is a risk that some of the children may not agree with the plan.
“The farmer has no obligation to give anything to his or her children,” Tufts said. “If the children cannot agree on the use for the property, a farmer could develop a business entity that would survive past the farmer’s life.”
This means the business would own the land, making the land available for rent by the farming children. At the same time, the business entity would provide rental income to the other children. This setup prevents one sibling from forcing a sale.
Farmers could also form a trust where they dictate the use of the land. A trust document could help the farmer set out land usage guidelines and land income distribution specifics.
“The trust actually has more security in terms of keeping the business entity or the farmland in the event of divorce, creditors or bankruptcy,” Tufts said. “So the trust provides more protection for the land, and it gives the farmer the option to specify how the land is used, but it takes a little more thinking to put together the trust, than it does the business entity.”
Source : aces.edu