Tuesday, 7 November 2017
Just as owning land is part of the American dream, so too is keeping it in the family. Statistics show that a considerable number of family farms will be changing hands in the near future.
The average age of farm operators has been increasing for the last 30 years. According to the 2012 Census of agriculture by the USDA, the average age of U.S. farm operators is now 58.3 years old. A full 40 percent of farmers today are older than 55 years old and the fastest-growing group of farmers is those 65 years old and older.
Even for younger operators, it's never too early to start the process of putting a succession plan in place that will address everything from a retirement target date to funding options for the ownership transition.
As with any succession plan, the first step is to open up the lines of communication. Passing on the family farm is more than just the transfer of assets. Families need to have a frank discussion about their contributions and goals. Too often, owners start planning too late or don't plan at all because succession planning centers on hard-to-discuss topics like money, disability, death, and family dynamics.
Consider holding a family business meeting or even bringing in a third-party facilitator to ensure that the meeting runs smoothly, covers all the necessary points and that everyone gets to voice their concerns. Experienced bankers or wealth managers can help facilitate parts of the discussion. There are also various government programs that can help with succession planning. Some states offer farm viability programs that help cover the costs of succession planning.
Figuring out the best course can be the most difficult part, so farm operators should consider consulting with legal, tax, and financial advisers about succession plans. Once a plan is decided, the rest is straightforward.
Owners will need to secure the transfer of ownership, generally a combination of powers of attorney, a will, and trust provisions. As part of this process, you'll need to assess the value of the land, buildings and other assets.
Your team of advisers can help figure out the pros and cons of different arrangements and help with tax implications. According to the USDA Economic Research Service, farm owners are more than twice as likely to owe federal estate taxes than a typical descendant. Many farmers don't have sufficient cash on hand to pay the sum. In such cases, a life insurance trust can help create the needed liquidity.
Farm operators who plan to sell will need to think about how important it is to preserve the farm. For instance, a Texas A&M study found that more than 1.1 million acres of working lands in Texas were converted to non-agricultural use between 1997 and 2007. A key factor in these conversions: a farm's proximity to growing major metropolitan areas. Farmland on edges of the Dallas Fort Worth area, Austin, or San Antonio is likely to garner a higher valuation than farm land in more rural, less developed areas.
Farm operators who transfer property within the family usually do so below market prices. Those who transfer to another farmer who is not related to them can structure the sale with conservation easements that protect the land from development and make the property more affordable.
Besides the actual transfer of assets, owners also need to think about management.
Owners who are passing on the farm to one or more family members need a plan in place to train and develop the successor(s). For those with more than one successor, how will the roles be divided?
Those with one successor and another child who does not wish to take on the family farm need to consider if they want or can make any additional financial commitment to their other children. For instance, some families establish individual insurance policies that pay cash to non-farming heirs upon the parents' deaths and, separately, leave farm assets to farming heirs.
Farm owners also need to consider their own retirement. Some farmers choose to rent out their land. It's also beneficial to diversify wealth into a portfolio that includes not just land but also bonds, stocks and other investment vehicles.
Without a solid succession plan, a family farm could be more vulnerable to going out of business, being acquired by a larger farm or being converted to another use, even if that wasn't the owner's intention. Also, state law may dictate how the farm and associated assets are distributed in the absence of a succession plan. Creating a succession may be an appropriate way to create a roadmap for your family to create a lasting legacy.
The content provided is for informational purposes only. Neither BBVA Compass, nor any of its affiliates, is providing legal, tax, or financial advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA Compass or any of its affiliates.
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