Generational shifts are causing an unprecedented transfer of wealth in the United States and farm country is not immune to those changes. Farm assets, however, require unique structuring and attention to detail to have hope of carrying on, intact to the next generation.
Oklahoma State University professor and lawyer Shannon Ferrell spoke candidly about the difficulties facing farm families as they transition to younger generations during the first annual AgKansitions conference in Erie, Kansas.
“It’s tough going through a transition on a farm, because you have to go from recognizing people as your kid, whose diapers you changed, and realize that that human being has aged since then,” Ferrell said. “And that human being is going to have to, at some point, become your peer, your colleague, and may eventually be your boss. And that is a hard transition for humans to make. But it’s also a necessary transition for humans to make if this is actually going to work.”
For a business model in which the transition of assets is so critical to overall longevity and success, Ferrell said individuals in agriculture have a shockingly high lack of estate planning tools in place.
“Generally speaking as a country about 55% of American adults have estate tools in place,” Ferrell said. “But in agriculture, we’re way better than that, right? I mean, we’re in a business where the net worth of an average U.S. farmer or rancher is $1.2 million. We have got a ton of assets to take care of. We care about our heritage. We’re doing way better, right? False. Two thirds of us don’t have any tool in place whatsoever. Nothing. And what’s going to happen to our assets? They’re going to get scattered to the winds basically.”
Lack of estate planning for farms is also closely related to a lack of retirement planning. Over 88% of farmers and ranchers don’t have retirement plans and instead remain working on the farm in perpetuity. And, as Ferrell said “Rigor Mortis makes an inflexible farm manager.”
The result, is a devastating track record for family farms transitioning through the generations.
“If you take a farm and take them through one generational transition, 30% of them survived that intact. We’re talking about keeping the asset base together,” Ferrell said. “So if I had 100 Farms, 30 of them make that transition. You take it down to the grandkid level, that number falls to 12. If you take it down to the great grandkids level, that number falls to three. So you started with 100 farms by the time you get to the great grandkids, three of those asset bases are still intact.”
When looking at potential pitfalls, Ferrell said there are three major causes for farm transition failure.
Inadequate Estate Planning
Inadequate estate planning is the first foundational pitfall of poor farm planning and the longevity of the farm is not the only suffering party in these instances, Ferrell said.
“Widowed persons are three to four times more likely to live below the poverty line, than their married counterparts because they’re the first victims of a lack of planning,” Ferrell said. “It will take care of itself, right? And so then Mom has to bear an incredible burden.”
States do have basic estate statutes in place, Ferrell said. The judicial system handles estates in an even, unbiased manner, but not one that caters to the longevity of the farm or its assets.
“Those statutes will cause the breakup of your farm asset base, not because they’re evil or nefarious, it’s just how it’s going to work,” Ferrell said. “They’re going to send those assets in undivided interest to people who do not have compatible interests with the farm. And it’s going to break apart.”
In order for farm assets to remain intact, as well as retain fairness to generations split between on-farm and off-farm children, Ferrell said sometimes unique and varied approaches need to be made tailored to individual operations rather than a one-size-fits-all approach.
If a farm is not consistently profitable, there may not be reasonable available capital to make the business viable for a new generation, Ferrell said.
“Sometimes, we might not be honest with ourselves about the financial performance of our operation,” Ferrell said. “Our operation may be propped up by off-farm income, mineral income, wind income, all sorts of stuff that doesn’t deal with how productive our farm asset base is.”
Honesty about the state of farm assets during the estate planning process is crucial to identifying and managing this obstacle.
“If we’re not honest with ourselves about trying to make this business a profitable enterprise, then we’ve got a really expensive, risky hobby,” Ferrell said. “If this business has value from the way that it is run as an integrated business enterprise, then we’ve got to preserve that enterprise intentionally as it goes to the next generation.”
Failure to Prepare the Next Generation
Preparing the next generation to take over the farm business is much more than providing access to on-farm sweat equity-building experiences. Though, those surely can’t hurt.
“Are we really preparing that next generation to take over for us? Are we teaching them not only the how of stuff, but the why of stuff?” Ferrell said. “How is for technicians, Why is for managers. You have got to teach people why and prepare them to be a leader of this enterprise.”
Everything from account passwords to vendor relationships can make a difference for individuals taking over the day-to-day farm operations.
Additionally, Ferrell said dividing farm assets between heirs evenly and forcing off-farm heirs to co-exist with on-farm heirs in a business relationship often causes difficulty for both parties and cripples the potential success of the farm enterprise.
“If I give an off-farm heir that’s got no interest in coming back to the farm undivided interest in that farm, I’m forcing the on-farm heir to purchase that interest from the off-farm heir,” Ferrell said. “I’m here to tell you it’s going to happen. And your farm is not going to be able to sustain that. It’s not financially going to be able to pull it off.”
Ferrell suggested identifying and allocating equivalent cash assets for off-farm heirs in order to maintain equality while protecting the viability of the overall farm for those that wish to continue the family legacy.
Overall, Ferrell suggested approaching estate planning with open eyes about the reality for the loved ones who will carry on the farm legacy in the coming generations.
“You thought you were doing something for them, but you’re doing something to them,” Ferrell said. “And it’s going to be hard.”
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