Introduction to Farm Succession Planning

Every farm, ranch, nursery, dairy, or other agricultural operation is more than a business. It is a connection to family, tradition, and your legacy. It also provides essential food, fiber, fuel, and other benefits for society. While business succession and estate planning may be uncomfortable topics, open discussion and practical business decisions are necessary for the farm to serve its important roles to your family and society, protecting your legacy.

This guide gives you a starting point as you consider your alternatives and begin family discussions about the roles that each family member or nonfamily member may play in the future of the farm as a business.

Your business succession and estate plans start with you: your goals, your choice of who will manage the farm in the future, and your family’s wishes. That will be the first conversation with your business and estate planning lawyer, so do your homework and save some time! Get started by talking with your family:

• Begin the conversation; Let loved ones know you are thinking about the long-term future of the farm.
• Talk to your family about your estate plan; define and start establishing expectations.
• Discuss farm succession with family members who express an interest in managing the farm; assess commitment and involve them in decision-making.
• If you do not have a potential successor in the family, seek one out by:
  • 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.
• Identify professionals that can help you through the process; ask around and get advice from lenders and other farmers.
• Attend a business succession workshop or seminar to learn more.

The business succession planning process should include making the business stronger as well. By bringing in the next generation, the goal is not to give more people a smaller slice of the pie but to make the pie bigger in the planning process. You will need to gather this information to work with your lawyer and accountant, so do your homework to save some time and money! Tune up the farm’s financial situation and develop a plan to expand the business:

• Determine the income needs of everyone involved in farm management, recognizing that needs will vary by generation and will change as family members change roles.
• Determine the farm’s value; Inventory all farm and non-farm assets.
• Evaluate the rate of return; is the farm generating enough income to cover income needs?
• Make a business plan and involve the incoming generation of farm managers by:
  • Assessing their skills and interests
  • Providing training and experience
  • Allowing a sense of ownership to develop for each role.
• Consider options for converting farm assets into cash; conservation or working lands easements may be helpful, but be aware of benefits and risks of each approach.
• Start taking appropriate legal steps to manage risks: insurance coverage, drafting contracts, filing liens, invoking statutory protections, etc.
• Work with your accountant and other business planning professionals as you make business decisions.

To protect your agricultural business now and into the future, use legal tools to manage risk. Organizing your business as a legal entity, such as a Limited Liability Company (LLC), allows you to protect your personal assets and family from business risks immediately. It will also help you pass on ownership to family members in the future. Learn about how you can operate your business as an LLC so that you are ready to make decisions with the help of your lawyer:

• Get recommendations from other farmers or lenders to find an attorney. Interview several attorneys and consult with your family about your choice.
• Carefully consider who will be an owner of the LLC and who will have the power to make management decisions. Consult an attorney to help develop an operating agreement with the right division of authority between owners and managers, buy-sell agreements to keep ownership in the family, and other safeguards.
• Set up your LLC by filing articles of organization with the Oregon Secretary of State and pay the fee.
• Work with your lawyer, accountant, and lender to capitalize the LLC with business assets.
• Set up excellent accounting practicies to keep your personal assets separate from business assets to ensure the LLC's limited liability protections.

Growing the business and adding more family members to ownership or management over time requires more structure to keep the family and farm together and manage risk. You can create and connect different farm LLCs based on the function that they serve in the business to manage risks now and allow an easy transition to a new generation of owners in the future. Take your business succession and estate planning to the next level learning about the "last-person-standing LLCs" and other organizational options:

• Review and organize your farm’s assets based on farm business activities, who will be involved, and how they will be connected. Work with your accountant and lawyer to set up the appropriate structure.
• Generate some options for a business succession plan. Review your options with family members and advisors to refine your ideas, and be sure that each generation's preferences are taken seriously.
• Plan out a business succession timeline. Consider the time it will take to grow the farm business if necessary, your timeline for retirement, and the training or other skills that successors will need before they are ready to take over management.
• Set up milestones for gifting or selling shares in the LLCs; involve other non-farm family members if you want them to begin taking ownership interests before your death.
• Update your plan as circumstances change. Schedule regular check-ins with your family and include professionals as needed.

We know that children can be completely different from one another in every way, and our gifts to them can be different too, as long as everyone feels taken care of and understands the reason for the plan that is created. For the long term health of the farm business, it is important that the incoming farm manager—whether a family member or from outside of the family—gets full management control while non-management family members can share in the financial and emotional benefits of farm ownership. Communication, clear roles, and good organization is key. Your estate plan is personal, prepare with your family to make the best use of the time you spend with your lawyer:

• Consult with your family members about their wishes to ensure that each unique family member gets the unique connection and support that will benefit them in your estate plan.
• Talk about succession plans openly and honestly; ease concerns before grief compounds the stress of distributing the estate.
• Decide on the business succession plan to give appropriate ownership and control to each family member based on their role in the business.
• Plan for other gifts or assets (family heirlooms, vacation property, personal vehicles, cash, life insurance proceeds) for family members who are not interested in the farm business, to promote unity and remain equitable.
• Consult with professional advisors regarding insurance, costs associated with estate taxes (if they apply) and gifts to non-farm family members or charity.
• Review and update your plan on a regular schedule if circumstances change.

After taking each step in the business succession and estate planning process, it is critical to again step back and see how the plan will work for both the family and the farm business. Ensure that your plan is designed to withstand some common disruptive life events, such as an unexpected death, divorce, or bankruptcy in the family. Plan for regular communication and maintenance of the plans with your family and your team of legal and financial experts.

By working through the business succession and estate planning processes, you have taken steps to preserve the long-term health of your business and to plan for the future of the farm and your family members. Remember that the most important thing is to have Thanksgiving dinner as a family, not as business partners. Your careful planning preserves the farm and its value into the future. It is important work and is a great gift to your family, to Oregon agriculture, and to society.

Plan to review and update your plan on a regular schedule if circumstances change. Keep talking to your family, keep immaculate accounting records, and check in with your attorney to maintain healthy relationships between family members and the business.