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An effective succession plan can help you achieve your retirement and legacy goals and set the next generation up for success. Start the discussion with your family now, and think through the details.

Wealth transfer

Succession Planning for Farming Families — Where Do I Start?

  • Craig McCormick
  • Kelly Jackson Hardy
  • 8/12/2021

Key insights

  • Succession planning for farming families can be complicated, so begin the discussion with your family sooner rather than later.
  • Detail your goals, and give everyone a chance to speak their mind about them.
  • Build a plan that considers multiple heirs, tax burdens, and paying for retirement.
  • Work with a team of professionals who can facilitate the planning process for all involved parties.

Need help starting your succession plan?

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The heart of a succession plan should be about preserving the legacy of your generation and at the same time preparing the next generation to succeed. Succession planning for farming families can quickly become complicated — especially when there are multiple heirs, some of whom may not be involved in the family farm. Start by getting your trusted team of professionals together, and begin the conversation sooner rather than later.

Have a heart-to-heart

This conversation is different for every person and every family. It is often more emotional than financial. Sit down with your family and have an open discussion about your goals. This gives everyone a chance to voice their vision of the future and can prevent surprises later. However, as the owner, don’t hesitate to put your needs first — after all, these are your assets and this is your legacy. Consider the following to get the conversation started:

  • What do you envision for the future of your farm? Are your family members on the same page?
  • Do you want to stay involved in the operations of the farm? What does that look like to you?
  • What kind of income do you think you will need for retirement from the farm?
  • How to you feel about paying income taxes on the transition?

Details matter

This discussion will be the foundation of a plan that passes on both your farming operations and the farm assets to the next generation. When building your plan, consider:

Multiple heirs

Do you have multiple heirs, some who work on the farm and others who are non-farmers? Assuming a desire to treat all heirs equally, splitting the family estate can be complicated. However, there are options that can protect the interests of all sides and leave your legacy intact, including:

  1. Passing down non-farming assets (e.g., retirement accounts) to non-farming heirs and the farmland, equipment, and livestock to your farming heirs. This can help avoid family disputes, but may require a significant sum of assets outside of the farm in order to equalize the estate.
  2. Creating a plan that, over time, allows one farming heir to purchase the land from all other heirs. This plan can take many forms, but should be agreed upon by the heirs in advance, since they will be the ones to execute the plan over the course of many years.
  3. Simply dividing the farmland equally among all heirs. This allows each of the heirs to work toward their goals independently, but may end with portions of the family farm being sold outside the family. If there is an heir that currently operates the farm, this option can include significant income risk to them.
  4. Using an entity to provide cash rent income to the non-farming heirs, while preserving the farming heirs’ ability to farm that land at a reasonable rental rate.

Minimizing tax burdens

For 2021, under current law, the federal estate tax exemption is $11.7 million or $23.4 million for a married couple. There is also an annual gift-tax exemption of $15,000 per donor, per recipient, and unrealized appreciation of assets held at death are not subject to capital gains tax. Your estate plan should factor in these and other laws to help reduce your estate tax burden, which could ultimately affect the amount of assets you pass down to your heirs.

There are multiple strategies to help reduce a taxable estate, such as gifting assets to your heirs during your lifetime instead of at death, as this also removes future appreciation of those assets from your estate. However, be careful not to get so caught up in estate tax issues that you gift all income-producing assets — especially if you rely on that income for your own retirement.

Paying for your retirement

Start succession planning talks early so you have time to reach your retirement goals. Speak to a financial planner to help identify the cost of your standard of living, how much you will need to pay for high health care costs (and possibly long-term care costs), and how much you will need to save in investment accounts like IRAs.

“What will I do with my time?”

Succession planning is about more than money. There is also a significant emotional component associated with it. In the ag community, individuals sometimes devote their entire lives to the farm, and it can often be hard to leave.

  1. Are you and your spouse in agreement with what retirement looks like?
  2. Is there a way to slowly transition, or are you ready to quit “cold-turkey”?
  3. How long do you need to make the transition, not just from a financial perspective but from an “I’m ready” perspective?
  4. What do you want to accomplish in retirement?

There is definitely no “one-size-fits-all” approach to succession planning. Derived from your own values and goals, your family can customize a plan that not only works toward achieving your own retirement and legacy goals, but also helps that next generation take another step toward theirs. The important thing is to simply start the discussion with your family and a team of professionals who can gauge the conversation and help you take the necessary actions.

How we can help

In a solid financial planning process, knowing the answers is important, but so is knowing the questions. CLA creates a seamless experience when our tax and wealth advisory professionals work together to deliver opportunities to you. We help you develop a tax planning strategy, integrate those strategies into a goals-based financial plan, and align your investment management.

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