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What you need to know before passing your farm to your children

Historically, farming has been a way of life. Family farms have been passed from parents to children for generations, with sons and daughters raised as farmers, spending their formative years learning every aspect of operating a farm. For decades and centuries, it was the best training a future farmer could receive. But increasingly, that method of succession planning is falling by the wayside, due to a number of factors.

The technological and financial matters associated with running a modern farm have become exponentially more complex, requiring more training than the parent-child relationship can generally provide. Crop pricing is increasingly volatile, making farming a less-stable means of employment and income than it was decades ago. And many younger family members simply don’t want to pursue farming as a career, opting instead to explore many different career paths before committing to a field.

“The sum total of all that is that a lot of the next generation is simply unprepared to take over the family farm,” says Dave Shealy, president of The Shealy Group. “They may or may not know how to do all the aspects of farming, and that’s a problem because farming is more complex than ever before. The numbers you’re dealing with are bigger than ever before.”

That means that if you’re a farmer looking to pass your farm on to your kids, you have many more things to consider than your parents and grandparents did. It’s about much more than showing your kids the ropes. You have to determine who among your family wants to take over the farm, ensure that those children receive the proper training both from an operations and finance standpoint, and plan a fair exit strategy for the children who want to explore careers in other fields.

Here are guidelines to get you started.

Clearly communicate
Don’t assume that any aspect of this transition is understood without being explicitly stated. At some point, when they’re mature enough to understand the situation, tell your kids that you want them to inherit the farm and keep it running. But do it while they’re still young enough that they haven’t plotted out their career paths yet. Give them a number of years to consider what it is they want to do with their lives.

“This is something you have to do while you’re still young enough as the parents to be running things, and while they’re still young enough that they have considerable time before they have to decide on a career and a life path,” Shealy says. “If you let your wishes be known to the whole family, it makes the transition much smoother for the kids who do want to take over, and it makes the communication better in general.”

Make a plan
Perhaps all of your children want to inherit the farm and take an active role in running it. That makes it much easier to pass along the ownership stakes that each child inherits. But what if two kids want to run the farm, and two want to pursue other careers?

“That makes the transition a lot more difficult,” Shealy says. “How do you value things for all of them in a way that’s fair? How do you consider the economics of the farm and negotiate a plan that allows your non-involved children to transition out without putting undue financial strain on the ones who do want to be involved? In most cases, it requires the non-involved kids selling their assets at a discounted rate.”

Fair doesn’t always mean equal
If an appraiser values your farm at $7,000 an acre, the children who don’t want to be involved in farming might have to sell the shares of the farm for a significant discount — perhaps as low as $4,000 an acre. Even though each child doesn’t inherit an equal financial share of the land, it’s usually a fair trade off, giving a financial break to the siblings who will run the farm in exchange for an easier way out for the siblings who want to pursue other interests.

“In those situations, a good rule of thumb is usually selling for the equivalent of what a bank might finance,” Shealy says. “If your kids could only borrow up to $4,000 per acre against the property, I usually tell my clients that’s a fair discounted selling price for the kids who don’t want to be involved.”

Define roles
Once you’ve established who among your family wants to be involved in the farm, the final critical step is to make sure you’ve established who will be doing what. If one child will handle operations and one will handle financial matters, make sure that’s understood and put it in writing. Doing so will make for a much smoother transition when you retire and reduce the risk of family infighting and power grabs.

“Experience plays into it traditionally,” Shealy says. “Everything is interdependent in a modern farm, but it’s much better to determine who wants to run the operations, who wants to handle selling and purchasing, and who wants to oversee the money ahead of time — while you’re still in charge.”

Dave Shealy grew up on a modest farm in Crawford County and understands the challenges unique to
family-owned businesses. To learn more about passing your farm on to your children, contact him
at dshealy@shealygroup.com.

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