Author: Laura Troshynski, Senior Director, Business Owner Advisory Services

You’ve worked with your attorney to create a comprehensive estate plan. You may even have an asset transfer plan in place. But have you planned for what happens when the next generation takes over the operation?

Estate planning is an important part of preparing for the future, but transferring ownership of a farm is not the same as preparing the next generation to operate it. A successful transition also requires planning for the people, responsibilities, relationships and knowledge involved.

That’s where farm succession planning comes in.

Key Takeaways

• Estate planning and farm succession planning serve different purposes.
• Succession planning prepares the people and operation, not just the assets.
• Early communication can help reduce family conflict.
• The right adviser team can help guide the transition.

How Is Farm Succession Planning Different from Estate Planning?

An estate plan outlines how your property and other assets will be distributed after your death. Other estate-planning tools may also help determine how and when ownership transfers. Farm succession planning focuses on how the ag operation will transition from one generation to the next.

It asks a different set of questions. Who will run the operation? When and how will responsibilities shift? Is the next generation prepared to take over? And does everyone involved understand what the transition will look like?

A farm succession plan may address factors such as:

• Timing: A farm transition may begin long before the current owner fully steps away from the operation. Planning can help establish when responsibilities and decision-making authority will begin to shift.
• Roles and responsibilities: Defining who handles key aspects of the operation today can help determine who needs to assume those responsibilities in the future.
• Preparation: It takes time to prepare the next generation with the knowledge and skills necessary to successfully run the business.
• Family considerations: Those who will be active in the operation may have different roles and expectations than family members who will not be involved in running the farm.
• Financial considerations: A transition can have financial implications for both generations that should be considered as part of the planning process.

What Can Happen Without a Farm Succession Plan?

Consider what would happen if a successor suddenly became responsible for the operation. Years of knowledge and experience don't automatically transfer along with land, equipment or other assets. Without adequate preparation, a successor may find themselves responsible for making critical business decisions without the skills, training or operational knowledge the previous generation developed over decades.

The effects can extend beyond the family. Agricultural operations often depend on established relationships with advisers, lenders and others who do business with the farm. If those relationships haven't been developed with the next generation, a transition can create uncertainty and disrupt business continuity.

There can also be consequences within the family. Family members who don't understand the succession plan may be surprised by decisions about ownership, responsibilities or assets. If they feel blindsided or excluded from the process, misunderstandings can turn into resentment and family conflict.

A succession plan can help address these issues before the transition occurs.

Communication Is an Important Part of Farm Succession Planning

Succession planning isn't only about determining who gets what. Open communication can help family members understand the plan, their roles and what to expect as the farm transitions.

Those conversations can help answer questions such as:

• Who wants to be actively involved in the operation?
• What roles will different family members have?
• What skills or experience will the next generation need to develop?
• What do family members who aren't active in the operation need to understand about the plan?

Including family members who aren't involved in running the farm can be particularly important. Having family business conversations can clarify misconceptions and help family members understand the reasoning behind transition decisions.

These conversations aren't always easy, but having them early can create greater clarity about what's ahead.

Don't Overlook the Knowledge Behind the Operation

Beyond land, equipment and other physical assets, an established operation depends on years of accumulated knowledge. That includes day-to-day operations, lesser-known responsibilities and where to find important information.

A farm succession plan can also help identify critical operational information a future operator may need that typically won't appear in estate documents, including bank account information, passwords, key business contacts and other important details.

In other words, some of the most important assets being transferred may never appear on a balance sheet.

Identifying that knowledge early gives the next generation time to learn, ask questions and gradually assume greater responsibility before a transition occurs.

How to Start Farm Succession Planning

Family farm succession planning can feel overwhelming, particularly when a farm has been in the family for generations. These three steps can provide a practical starting point.

1. Build your farm succession planning team.

Consider assembling a team of advisers that includes an attorney, accountant, banker, financial planner and other advisers appropriate to your operation. Together, they can help your family evaluate farm transition scenarios and the legal, financial and operational implications of each.

2. Understand your financial picture.

Review both business and personal balance sheets for accuracy so your family and advisers have a clear picture of the assets involved in the transition. Understanding the value of the business can also provide important context for succession planning.

3. Define roles and responsibilities.

Take stock of who does what within the operation today. Creating job descriptions or otherwise documenting responsibilities can uncover just how much knowledge and decision-making resides with individual family members.

From there, consider what those roles could look like in the future and what preparation the next generation may need before taking them on.

Succession planning doesn't have to answer every question immediately. Starting the process gives your family and adviser team an opportunity to identify the questions that need to be answered and work through them together.

Taking the time to create a thoughtful transition plan is one of the best gifts you can give your family.

For farm families unsure where to begin, FNBO's Business Owner Advisory Services team can help facilitate conversations, identify areas that may need additional planning and work alongside a family's other advisers throughout the transition planning process.

About the Author

As the Senior Director of Business Owner Advisory Services at FNBO, Laura brings her experience working with business owners, and as a former member of a family business, to the Business Owner Advisory Services team. With an extensive background in business and estate planning, Laura is well qualified to help others plan for business transitions.