Farm Succession Planning Phase 1 - The First Step


Volume 8 • Issue 7 • August 2018

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month’s issue is the first in a four-part series about the farm succession process. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.

Sometimes we make the process more complicated than we need to. We will never make a journey of a thousand miles by fretting about how long it will take or how hard it will be. We make the journey by taking each day step by step and then repeating it again and again until we reach our destination.

                                                                                                -- Joseph B. Wirthlin

When beginning the farm succession process, to determine that first step, it is helpful to divide the process into four distinct phases.

Phase 1 - Determine where the farm is now;

Phase 2 - Determine where you want the farm be in the future;

Phase 3 - Create a road map or game plan to get the farm there; and

Phase 4 - Implement the plan.

This month’s newsletter will discuss Phase 1 and the steps in determining where the farm is now.

Why Evaluate Where the Farm Is Now?

Evaluating where the farm is now provides an opportunity to step back and look at the operation from a broad perspective.  It can help the family determine if the incoming generation understands the operation at the same level as the departing generation.  This evaluation will put the family on the same page regarding details about the operation.  Finally, it helps set the stage for figuring out where you want to go.  Only by assessing where you are currently can you know what steps will be necessary to arrive at the desired destination.  If a person asks you how to get to the farm, the first question will be where are you now?  The same holds true for succession planning.

What Do You Need to Know?

In evaluating where the farm is now, there are a number of areas that should be considered.

  1. Who are the family members that need to be involved? Because of the unique nature of family businesses, especially family farm businesses, the involved family members will likely include more than just the outgoing farmer and the incoming son or daughter. It will involve non-participating children, it will involve spouses, even the spouses of the non-participating children. It may involve grandchildren and their spouses. What is their current situation? Are there special issues that need to be addressed regarding any family member? What are the personalities? Are there existing conflicts? What are their unique skills and abilities? What are their weaknesses?

  2. What is in place already? An evaluation of the existing plans should be undertaken. Are there existing business entities? What kind of entities – corporations, LLCs, partnerships? How are they taxed? Has anyone created an estate plan? If so, what do the plans say?

  3. Who are the decision makers on the farm? There are operational decisions and strategic decisions. Are all of those decisions being made by a dictator, hopefully a benevolent one, or are they diffused to different people?

  4. What are the current jobs/responsibilities? An organizational chart should be created to identify each of the jobs in the operation and who is responsible. One person can have more than one job, but no more than one person should be responsible for a job.

  5. What are the farm assets? Does the farm own land, lease land, or both? What about equipment and livestock? Who is the owner? Will leases transfer? Does the incoming generation have relationships with the owners? Are leases written or oral?

  6. How is the money handled? How is income distributed to the outgoing and incoming generation? How are expenses allocated between the two generations? Are personal bills being paid by the farm? What are the financial needs of each generation? Who has been responsible for paying the bills? Does the incoming generation understand the expenses of the operation? Does the incoming generation have a relationship with lenders, suppliers, the accountant?

  7. What non-farm retirement savings exist? Is the departing generation going to rely solely on income generated from the farm transition to live on in retirement? The more non-farm retirement savings exist, the more options are available.

Wendall Berry is purported to have said: “If you don’t know where you are, you don’t know who you are.”  The first phase of the farm transition process will help you determine where you are and by extension who you are.  Phase 1 is the foundation that will set the stage for upcoming phases, so take the time to evaluate where the farm is now.  Take the first step.

This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.