Succession planning for farmers and ranchers is important, but it’s also complicated. Land, equipment, equity, your own retirement — how do you even begin to think about handing your business over to the next generation? First, you need a trusted team of professionals, including your insurance agent. Then, you need to start the succession planning process as soon as possible to ensure a plan is in place before you’re no longer able to run the farm.

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The best way to transfer a family farm or ranch varies from family to family. That’s why the first step of an effective farm inheritance and succession plan is to define your goals by prioritizing your needs first — after all, these are your assets. Then, you can incorporate the needs of future generations who will also benefit from your succession plan.

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Most importantly, your goals should factor in your needs in retirement and as you age. In the process of passing the family farm or ranch to the next generation, you may start letting your heirs manage the land, purchase farm equipment and take on more responsibilities. But you might need income from assets like cell towers, billboards, natural gas and rental properties to support your lifestyle in your retirement years. If these revenue streams are essential to your retirement plan, don’t feel pressured to release them within your lifetime. 

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The following questions can help you identify priorities:

• Is it important for the business to continue?

• Does the successor generation want to provide a dignified retirement for the owner generation?

• Does the owner generation value keeping the land in the family name?

• Do the successors’ priorities match with the owners’ priorities?

 

As you map out your succession plan goals, also consider what’s important to you. If your home has significant meaning to you and your family, you may want to keep it in the family. Likewise, there may be certain charities you’d like to gift assets to, or you might have stipulations on the how the land you’re passing on should be used. Ultimately, you must determine what you want for your legacy. This will be your north star when you put your farm succession plan into motion.

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Next, think through the logistics of your succession plan, starting with who should be involved. This can be a difficult task, but it’s your job to make sure your farm or ranch will be managed well so it continues to thrive for future generations. To help determine who should be part of your succession plan, ask yourself these farm succession planning questions:

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• Do I have one or multiple heirs?

• If I have multiple heirs, what is the split between those who are farmers/ranchers and non-farmers/ranchers?

• If there are multiple heirs who want to farm the land, would they be able to work well together?

• How might increasing the number of heirs affect my farm succession plan?

 

Once you’ve answered these questions, you’ll know whether you have one or more heirs and what roles they’ll play in the future of your farm or ranch.

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This is the most straightforward situation when it comes to succession planning for farming families. When you have a single heir, there is less concern about squabbling family members and less risk overall. As you age, make sure you’re providing guidance to your heir. The last thing you want is to have your legacy handed to someone who isn’t prepared to fill your shoes. It’s also important to have a will in place. And while this is the simplest scenario, it doesn’t eliminate the risk of family members arguing about whether they should have a stake in the future of the farm or ranch.

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When there are multiple heirs involved, the farm transition process becomes more complicated. The more heirs you have, the greater the complexity.

Effectively navigating these waters requires frequent, clear communication. You may have a child who loved farm work when they were younger, for example, but that doesn’t necessarily mean they want to return and take over the business. Communicating early and often can help you understand the expectations of your heirs and build a succession plan that balances the desires of each heir with your goals.

Once you’ve gathered the necessary preliminary information, you can begin to build your plan. Often, the ideal scenario is to leave the farm or ranch to one or two farming heirs who are passionate about running the family business and who are prepared to do so.

If you have more than one or two farming/ranching heirs, you’ll want to work even more closely with a third-party advisor to ensure you leave the most viable business structure in place. The more people involved in future management, the more likely it is that your farm or ranch will be managed in ways you hadn’t intended.

In some cases, a farm succession plan includes heirs that won’t continue the legacy of the farm or ranch. When there is a mix of farming/ranching and non-farming/ranching heirs, there are three main ways to split inheritance:

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The Inheritance Reflects the Stakeholder:

 It’s often best to retain as much of the farm as you can in one unit. This can be accomplished by passing down assets like rental properties, gas and mineral rights, and retirement accounts to non-farming/ranching heirs, while passing down the farmland, livestock and equipment to farming/ranching heirs. This approach can help you avoid family disputes by providing an equitable outcome for all parties.

 

A Structured Purchase:

Another option is to enable one of your heirs to purchase the land from others over a number of years. If you have three heirs, for example, you could structure your plan so that each heir receives one-third of the land, with one heir bound to purchase the land from the other two over the course of 20 to 30 years through a contract for deed.

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Dividing Farmland:

A third option is to divide the farmland equally between your heirs and let them do with the properties as they wish. While this strategy can work, it’s a common myth that the only way to fairly pass on your farm or ranch is to equally distribute the land among heirs. In fact, this is generally the riskiest option as it can lead to a fractured farm and may reduce the value of the land. A 200-acre farm can create a lot of income, but a 200-acre farm split five ways leaves each heir with 40 acres of farmland, which limits total production by reducing economies of scale. Not only that, but the non-farming heirs are likely to sell the land, which means that it will leave your family’s ownership.

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If you decide to split the land, carefully consider what is best for your legacy long-term. Each split further fractures the land and limits the long-term viability of the business and the likelihood the land will stay within the family.

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If you do not have a potential successor in the family but your family wants to retain ownership, you may need to do a little legwork to find someone who is willing and able to run the farm. As it becomes increasingly more difficult to start a new family farm without a massive amount of capital, maintaining family ownership can offer opportunities for future generations, while land ownership can provide a sense of security during tough economic times. But be sure to consider whether the farm’s business has the financial ability to employ a manager, while also providing adequate retirement cash flow. 

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You can start to seek someone out by:

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• Networking with other farmers

• Connecting with programs that offer farm training or young farmer programs

• Considering current employees or setting up an internship or limited farm manager position with no long-term commitments — start early and be willing to work with several potential successors

 

Regardless of which option you choose, you should work with a team of farm succession planning professionals to make sure that you’re creating an effective plan. This team typically consists of your insurance agent, lawyer, financial planner and certified personal accountant (CPA).