While it might be nice to imagine riding the tractor off into the sunset like the cowboys of old, the reality is most farm operators will leave loved ones behind when they pass. The goal of farm succession planning focuses on giving those left behind the best possible start to ensure the farm and the family unit continues into the future.
During a meeting hosted by Cowley County Kansas Extension and the Kansas Farm Management Association, agricultural law expert Roger McEowen took participants through a crash course in setting up the transitioning farm for success.
“How do you transition in the new generation while at the same time moving out the older generation in terms of management and control,” McEowen said. “If we’re separating out those interest — the management interest and the control interest from the ownership interest — that by itself indicates some kind of entity.”
In times of transition, legal entities can be a mechanism to solve multiple problems of management, control and ownership all at the same time.
Transition Over Time
Farms looking to transition in the near future have probably already begun transferring ownership to the next generation.
Young farmers typically have to buy in to family operations slowly over a period of time, while maintaining some type of off-farm job to help supplement income during transition.
“Less leverage — that is a lesson that came out of the 1980s,” McEowen said. “It’s changed lenders thoughts and it’s changed farmers thoughts on the way that we transition.”
This longer horizon on transition planning exists because it isn’t feasible for young people to take on so much debt so early, and banks are often unwilling to lend highly leveraged loans, McEowen said.
Write It Down
One of the most critical components to every transitional step is to retain written, legal documentation. Should the farm need to be transitioned earlier than anticipated or tax guidelines come into question, it’s always good to have a paper trail. Those guidelines are especially true in the case of formal partnerships.
“If you’re transitioning without a sharing of labor and capital, then the one thing that you always have to be concerned about if it's just an informal arrangement and there's nothing in writing the relationship of the parties, whether they actually are indeed partnering,” McEowen said. “Often, the landlord will not want that because even if they are in a partnership, there can be joint civil liability. So often we want to get those arrangements in writing exactly what it is and what it is not.”
Avoid Equal and Aim for Equitable
McEowen warned producers that in cases of dividing assets and ownership between heirs, one of the worst missteps to make is dividing everything equally.
“You want to be fair, but that doesn’t necessarily mean equal in terms of value or in terms of assets,” McEowen said. “One of the worst things that parents can do if they have a farming operation and want it to be viable for the next generation is to leave the farmland in co-equal undivided interests.”
Selling farmland, taking the money and finding new, equal farm ground is typically an impossible scenario. The exact same road access, location, soil type and water options rarely appear after dismantling a farm. When equal asset cases are taken to court, McEowen said they almost always end with the land being liquidated.
“The on-farm heirs don’t want the money, they want ownership and control,” McEowen said. “If you leave the farm land in co-equal undivided interest, one fourth interest to each child, the off-farm heirs are going to push to have their interests, liquidated and converted into cash.”
Take Taxes Into Account
Tax laws for estate planning purposes have evolved many times over the last few years, with many of the changes becoming more favorable for transitioning families.
When organizing partnership agreements and corporations, it’s important to seek advice from legal and tax experts in order to navigate the rapidly changing IRS requirements.
“If the partnership hasn’t been specified then it’s not a true partnership,” McEowen said. “That can also come up in the context of income tax and association with the IRS because the IRS may view your relationship as a partnership for tax purposes and that has its own connotations.”
Listen to Law Professionals
Overall, succession planning doesn’t have to be an area of personal expertise in order to have it done well and done right. It’s okay to seek advice from professionals in order to make the transition smooth for all family members or partners involved.
“The best thing you can do for your own situation is to get these types of arrangements in writing, make sure it's clearly specified and don't cut corners on avoiding the legal help to properly refute,” McEowen said. “These types of arrangements are highly dependent on the facts. There is no one size that fits everything in the estate planning.”