Transitioning the farm: quick guide
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EmailThis article is a quick guide to the tools you need for your successful farm business transition.
Changes in life – with its exciting, sad and trying moments – can be hard. If you are thinking of transitioning your farm life, either beginning it or transferring to your heirs or an outside buyer, you know this to be true. Planning for change may seem like a luxury, but it is a necessary step. You will not save time by not planning, only postpone the succession of events or put the load of decisions you didn’t make onto someone else.
The following will give you a quick summary of the things you should do to plan for transitional changes at your farm.
First, remember: if it is not on paper, it didn’t happen. Don’t waste time taking steps, as little as they may seem, and not documenting them. Keep a notepad to write down your ideas and notes of your conversations with consultants and family members. Make sure to read your notes back to them to make sure they reflect their ideas, too.
Specifically, the two things that you want to come up with as you plan on transitioning in or out of farming are a:
- Management transition plan. It is a plan for the outgoing party to transfer decision-making to incoming manager and for the incoming party to transfer the support-giving role to the outgoing party. Remember that making mistakes is part of any learning process. Make a list of areas where training may be needed and create a structured plan to work on each one. Use the LARS learning sequence: learn, apply, reflect and share. It usually works best to use external resources at the “learning” stage, to “apply” and “reflect” solo, and to involve family, colleagues or friends at the “share” stage.
- Ownership and debt transition plan. Start by transferring working assets (machinery, cattle, crops, etc.) until the receiving individual or entity owns 100 percent of them. A lease-to-own agreement over 7 to 10 years is often used to achieve this. The incoming manager should buy any new equipment. Buildings, land and other real estate usually stay in full ownership and control of the owner until death, with cash or share rents paid to them. This provides flexibility, income tax savings and a source of income for them. Current business assets are usually transferred using combinations of sales, sweat equity and gifting strategies.
Whether you are at the stage of making those plans, turning them into reality, or just contemplating the idea, there are a few things that you should be doing to assist with the process.
Financial statements
These should be done every year. Specifically, you should keep separate annual business and personal balance sheets (or net worth statements) with complete inventories. Remember to include all equipment, livestock, insurance (including life), personal property and real estate. For real estate, note the names on the deeds and whether farm land preservation easements, tenancy agreements, life estates or adverse possession processes are in place. One should also note the location of all supporting documents. For insurance, bank accounts, cars, boats or mobile homes, note the names on the accounts or titles and the beneficiaries.
You should also keep annual income statements for your business. If you are wondering why, think about it: would you invest your money in a stock not knowing your income or loss potential? Would you expect others to do so? If your accounting system does not give you an income statement, tax records will do temporarily, but they are not ideal.
If you need help putting these statements together, Michigan State University Extension has resources available, including bookkeeping and financial analysis tools. Many of these resources can be found at the MSU Extension Farm Business Management website. You may also wish to contact your MSU Extension farm business management educator, who may help you find the right resources for your particular situation.
A business plan
Once created, this should be reviewed every five years and updated as needed. This should include a diagram of farm management roles, mission and vision statement, long and short term goals, description of labor force, legal structure and a projection of cash flow needs during the transition period (including labor, asset purchases, operating expenses and loan payments).
A will
A will is not absolutely necessary but it gives you more control over what happens with property and minor children if you die. Without one, the state court will name a guardian for your minor children and your estate will be closed through probate according to state law. One of the most important choices made during probate is who will serve as Personal Representative (PR). The PR is in charge of settling all accounts and distributing proceeds before probate is closed. If you appoint a PR in a will, the probate court will not need to determine this for you. The will also gives you a chance to specify how your property should be distributed after you die. With a will, probate is usually unsupervised, and it tends to go faster and smoother.
Like your business plan, once created a will should be reviewed every five years and updated as needed. Although you can create and sign the will with just two witnesses, it is usually recommended that you consult with an attorney. Place it in a clearly labeled file and show somebody you trust where it is kept. Never place it in a bank’s safe deposit box, as people may be denied access to it. Another similar document to consider is the power of attorney, which allows your representative to conduct your personal and financial affairs while you are alive if you become unable to do so.
We hope this quick summary serves as a guide as you dive deeper into this process. Your MSU Extension farm business management educator is available to discuss your ideas, facilitate conversations and provide financial analysis and planning tools. Check out the MSU Extension Farm Business Management website for more details on the business transition process and other farm business management tools.
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