Farm succession requires smart planning
Farms surviving from one generation to the next do not happen by accident. Instead, that success comes from a family having a clear goal for the future and a well-thought-out estate plan.
That was the message of Doug Claussen, a certified public accountant at KCOE ISOM, who spoke on estate planning and growth strategies for farmers at the American Farm Bureau Federation's 97th Annual Convention and IDEAg Trade Show.
Claussen encouraged farmers to start planning now for future growth and to develop a clear and concise strategy for having the next generation take over the operation. Of all family owned businesses only 30 percent reach the next generation, and much of that failure can be traced to a lack of communication among family members and no concrete plan.
'A lot of farmers want to build a legacy for their family,' Claussen said. 'Farms that have been around for 100 years didn't just happen by accident. There were plans.'
Estate and succession plans are personal to each farm family and their given circumstances, Claussen said. Are there children who want to take over the farm and siblings who are not involved in the operation? Does a parent still want to be involved in the farm and have day-to-day responsibilities? All of these factors have to be worked out as part of an estate and succession plan to avoid conflict and complications down the road.
'Estate planning means deciding on what you want to do with your assets in life and death. You want to minimize taxes and avoid those family disputes,' Claussen said. 'If the first time the kids hear about mom and dad's estate plans is at the reading of the will, there will be conflict.'
Claussen recommends that families consider legal structures like trusts in order to manage estates and help bring the next generation into the fold. One structure farmers have utilized is an Intentionally Defective Irrevocable Trust, which allows a parent to move assets from their estate, but still remain legally part of the operation. Under that structure, a farmer can still receive cash flow from the business, Claussen said.
On the income tax side, Claussen encouraged farmers to consider a number of strategies to even out their income and taxation from year to year. But again, doing so requires a strategy. Farmers can use deferred payment contracts and prepaid expenses to help manage their income tax obligations. Wages to children and donations of commodities can also reduce tax liability, Claussen said.
The future success of a farm is due in large part to smart planning and long-term strategy, Claussen said. And to make a smart transition from one generation to the next, farmers have to utilize the expertise of lenders, accountants and attorneys.
'Don't do it alone. This is not mom and dad sitting at the kitchen table,' Claussen said. 'This is strategic and requires having stakeholders as part of the process.'