Gary and Sandy Michaels are committing the time and effort it takes to prepare their farm, children and grandchildren for succession. This past spring, they attended a one-day succession planning workshop near their Sandusky County, Ohio, farm. "We want all of the resources we can find to make the best decisions," Sandy explains.
While the Michaels family is taking proactive steps for their future, too many farm families don’t, says Neil Harl, Charles F. Curtiss Distinguished Professor in Agriculture and emeritus professor of economics at Iowa State University. In fact, lack of planning is the No. 1 mistake he sees farm families make.
The common mistakes people make when pursuing succession planning fit into one of two categories, philosophical and technical, with farmers making philosophical mistakes most often, Harl says. Here’s his list of top pitfalls to watch out for when beginning the process of succession.
1 Lack of planning. People delay succession planning most often because they dislike discussing their mortality. Plus, they fear they will trigger family disputes in the process. "I strongly encourage people to think through what’s likely to emerge after their death between their kids if they don’t address prickly issues now," Harl says. The fear that they are too far along to start planning is a top concern for people who attend workshops run by Ohio State University County Extension educator Julia Nolan Woodruff. "People want to know, ‘How do we even start this conversation?’" Woodruff says.
2 Trying to be fair and equal. Too many farmers get hung up on trying to be both fair and equal
when making decisions about on-farm and offfarm heirs. While it is essential to give off-farm heirs a shared interest in the farm property, it can be detrimental to give them decision-making control over the day-to-day operation. For that reason, Harl encourages families to develop two plans: one that involves the land, which is what interests off-farm heirs most often, and a second that involves how the farm operation will function after mom and dad are gone.
3 Hastily picking a family trustee. Choose family representation very carefully, Harl advises. If significant authority is given to a single trustee or personal representative, consider having a co-trustee to provide a set of checks and balances. In the process of picking family representation, try to address potential problems your family could face in the future, such as a divorce, which Harl says can "rock a farm family operation to its core."
4 Neglecting valuation of property. Without a provision for the valuation of property for gifting and death valuation, it’s very easy for family members to have disputes over assets.
5 Placing all land in a corporation. Farm families do not benefit from forming a land-owning corporation, Harl says, because of tax laws. Land placed in a corporation will be taxed twice: once at the corporate level and again at the shareholder level. For those families who already have made this mistake, Harl says the best next step is to reorganize and split the corporation into pieces, giving each child a corporation of his or her own.
6 Ignoring family members who want to get out. "You need to develop an exit strategy at the time you put together the estate plan to specify how people can move in and out of the operation, especially out," Harl says. One approach is to pay exiting family members one-tenth of their share of the estate each year over a 10-year period with a reasonable rate of interest.
7 Inadequate counsel. Harl encourages farm families to work with local counsel for the sake of convenience, but to seek additional counsel in any areas that might need shoring up.