Less than two percent of the U.S. population is in farming or ranching, the average age of farmers and ranchers is approximately 60 years old, and urban development is a growing threat to farmable land. All these reasons, and many more, are why it is important to have a solid succession plan in place for farming and ranching assets. This includes, but is not limited to, land, equipment, livestock, and equity.
Thinking about handing your business down to the next generation can seem daunting, as there are quite a few things to think about and many steps to take. Succession planning is complex, and each farming or ranching business may look vastly different from each other.
The main two paths to take when looking at succession planning are wills and trusts. Trusts are beneficial because they can pass property and assets without going through the probate process. Wills allow you to pass tangible property, like jewelry and cash, if it doesn’t exceed 150,000 dollars in value, but you cannot pass the property outside of the probate process.
Farm Bureau Financial Services (FBFS) suggests that owners who are looking to transition their property to the next generation should first prioritize what your needs are. Consider what income you will need from specific assets that can support your retirement lifestyle. While you might allow your successor to take over certain management aspects, you may need revenue streams from certain assets, and you won’t want to give those up entirely in your lifetime.
Everything from keeping your family home, donating assets to charities, and stipulations on how the land should be used once you’ve relinquished ownership, should all be considered first and foremost. This will allow you to make a succession plan that benefits you and allows you to seek the correct professionals to help it come to fruition.
The next step is to determine who you’re passing down your property and assets to. Is there only one heir or multiple? With a single person, this simplifies the process greatly, but with multiple heirs, there are many opportunities for miscommunication and problems to arise. Be sure you’re communicating to everyone what your goals and plans are and be sure you’re leaving assets to the appropriate heirs who can handle taking over.
FBFS states three different ways to split inheritance when dealing with multiple heirs who may not all be continuing the legacy of the farm or ranch. These include the Inheritance Reflects the Stakeholder, which suggest passing down farmland, livestock, and equipment to heirs who will continue to manage the business, while leaving rental properties, retirement accounts and gas or mineral rights to non- farming/ranching heirs.
The Structured Purchase allows heirs to buy land from others over a number of years. This allows each heir to receive a portion of the land, with one heir bound to purchase their parcels from the others over a specified time.
The final option for split inheritance is called Dividing Farmland. This is where land is split evenly between all heirs and allows them full control of the parcel they inherit. This can lead to de-valued land and is one of the riskiest options for splitting inheritance.
Consider the assets which you’ll plan to pass down next. Machinery, livestock, feed, and land all have various ways to pass down to your successor, and most can have tax implications, so it is important to speak with a tax professional before adding them into your succession plan. For instance, machinery can be sold outright or in installments, or ownership can be transferred when machinery is traded, successors can lease the machinery as well. Gifting is another option that can help reduce some income tax consequences but could also result in what is called a “gift tax.”
It is suggested that you “shop around” for legal representatives. There are hefty fees when laying out a succession plan, and some legal entities may not fit what you desire. Always get a second opinion and compare pricing to ensure you’re getting what you need, while not overpaying.
Finally, the most important part of the succession planning is to openly, and formally, communicate with your heirs about your plan, your needs and wants, as early as possible. This will give you time to think through the process, work out any kinks, and ensure everyone is on the same page to ensure a smooth transition.
If you want to ensure your land is protected and used for farming or ranching instead of sold for housing or commercial development, you can contact the California Farmland Trust or the California Rangeland Trust to see what the steps are for that process.
This article is meant to inform, not as a replacement for seeking advice from licensed legal representatives. Work with a team of farm succession professionals, which should include your insurance agent, lawyer, financial planner, and a certified personal accountant. UC Cooperative Extension and the California Farm Bureau Federation are two great organizations that can help guide you in the right direction to begin the succession planning process.