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The Big Picture Transition Planning Process

Dr. Alex White, Virginia Tech Dairy Science

How do I transition my farm to the next generation?

What could be considered the most important plan of your farming operation is often the most overlooked. Transition plans are crucial to making sure your business keeps the same structure and purpose after you’re gone. A little bit of planning might help preserve your family farm, and more importantly, it might keep your family together. So, how do you begin? Dr. Alex White

Try to determine the goal of your transition plan. When you boil it down, there are basically five main options when it comes to transition planning for a family farm.

Top 5 Options for Farm Transition Planning

1.   Keep the farm in the family 

This option refers to the goal of the family to maintain ownership of the farm, whether they are actively farming the land or renting it out to others.  The pride of ownership of the “family ground” or being able to bring the grandchildren “back to the farm” for a visit are often main drivers in this decision.

2.   Keep the family in farming 

This option tries to keep the family in agricultural production.  This may mean keeping the existing farm in production or selling the existing farm to purchase a farm with better resources (better soils, water, or local ag services). Many times the families who follow this option are interested in improving their family’s situation and they are not emotionally tied to the land.

3.   Chain the family to the farm 

Unfortunately, many times the transition plan (or lack of planning) forces someone in the family to remain on the farm, whether that farm is profitable or not, or whether those individuals actually want to be a part of the family farm. This may not be intentional, but it can easily happen. Open communication and an objective view of your situation are critical!

4.   Keep the family from farming 

This situation usually comes about because the older generation wants to treat their heirs “equally”. Understandably, to avoid the appearance of showing favoritism amongst their children, many parents they leave equal shares of their estate (including the farm) to each child. Usually, this option leads to intra-family arguments over the future of the farm once the older generation has passed. There is a huge difference between treating your heirs “equally” and treating them “equitably”.

5.  Sell the farm 

What is the difference between a “good sale” and a “bad sale”?  A “good sale” occurs because it is the best course of action for the family and it meets everyone’s goals. A “bad sale” occurs when the farm must be sold against the will of at least one of the family members.  Unfortunately, “bad sales” are often the end result of option three and option four.

Once you have determined which one (or more) of these options is the best for your family and the farm, you can start the planning process. The six main steps of the process are relatively simple.

Big Picture: How to Start the Farm Transition Planning Process

1.   Procrastinate 

Put it off until you actually have the time and energy to do it.  Congratulations, most farm families have already completed this step! Now you can check off this step and move onto the next one. You’re making great progress! Seriously, you are.

2.   Decide to take action 

At some point, you will be forced to start the transition planning process. It’s much better to start the process as early as you can. You will have many more planning tools at your disposal if you start now. If you wait until someone has passed away, you have lost the opportunity to use several of those tools.

3.   Develop a transition management team 

Face it, no one knows all there is to know about transition planning. It involves farm production, financial management, income and estate taxation, legal issues, labor management, communication, etc. Yes, it might cost you some money to develop your team and have regular meetings. But, it’s like the old FRAM© oil filter commercials – “You can pay me now, or you can pay me later”. With legal and tax issues, it almost always costs a lot more to clean up the mess left by no/poor planning than it costs to develop a good plan ahead of time.

"it almost always costs a lot more to clean up the mess left by no/poor planning [...]"

4.   Set-up a timeline for the transition 

When you start the planning process early, you will realize that the transition does not have to occur overnight. You have time to mentor the younger generation. You have time to take the proper legal and financial moves for your family and farm. It’s important to develop a workable timeline to make the transition seamless.

5.   Develop a written plan 

This includes a written business plan that every business should have. It also includes your written transition plan. Putting it in writing makes it more important to everyone involved. It also gives you a sense of accomplishment. And, it helps minimize arguments caused by “selective memory”. Pull out your transition plan and your business plan at every business meeting to see if you are moving towards your goals.

6.   Accept the fact that transition planning is an on-going process 

Determining the future of your family and your family business is not a “once and done” item. You will constantly be making changes as tax laws change, or as family goals change, or as the economy changes. It is much easier to adjust an existing plan than it is to come up with a brand new plan.

If you’re ready to start the discussion of planning for your farm’s transition, Farm Credit can help. Give us a call at 888.339.3334 and we’ll help you prepare to take that first bite.

Dr. Alex White has taught a wide variety of college courses at Ohio State, NC State, Ferrum College, and Virginia Tech for the past 25 years. The courses he has taught include ag financial management, farm management, small business management, and several courses in person finance management. He has served as an extension agent and as an extension specialist (personal/farm financial management) for Virginia Cooperative Extension and has worked with Farm Credit in a variety of ways for the past nine years. He also happens to be a Farm Credit customer.