Time, effort and good records help one family protect their farm
In February the members of Maple Farms decided they didn’t want to leave the legacy of their farming operation to chance and started their farm’s transition planning. But the process isn’t a one day project—be prepared to invest your time and revisit plans.
“Change is hard and that’s OK,” says Polly Dobbs, an attorney working with the Maples and member of Farm Journal’s Legacy Project advisory board. “It’s better to go through the process now than leave it to the next generation to deal with.”
The 3,000-acre, Kokomo, Ind., operation will likely be finished with their transition plan around the first of the year, which is fast for any plan, but especially for a family and farm of their size. Helpful tips from the family include keep good records, have clear goals, communicate well and treat
the plan like a living document.
They got off on the right foot by treating their farm like a business and keeping accurate, easy-to-find records. They understand the inner workings of their farm, what kind of entity it is and tax considerations. Dobbs says safeguarding and understanding records like this makes for a much smoother and faster transition planning process.
The Maples also have clear goals for their farm, which is helping guide them throughout their transition planning. “We worked with a group called Water Street Solutions who helped us with strategic planning,” says Mark Maple, who farms with his brothers and cousins.
When they started working with legal and tax advisers they were a step ahead of the game by aligning each family member’s goals. This is a critical step to ensure no one is disappointed or feels cheated.
Communication before the process begins is critical, but it’s important to work together to keep stakeholders informed throughout the whole process as well. For the Maples, those operating the farm’s daily activities met more frequently to keep progress on the plan moving forward and to prepare for their shareholder meeting, where they would discuss plans with the larger group.
Some conversations might be tough, especially if there’s a change in taxes or cost to stakeholders. Make sure you’re prepared so you can answer questions. For the Maples, it meant attending seminars, reaching out to experts and treating each shareholder meeting with professionalism to address any tough subject or question.
“Understand this is a living plan that needs to be dusted off, reviewed and revised,” Dobbs says. “My rule of thumb is five years or whenever there’s a change in circumstances, value of assets or a change in the law.”
Be prepared to work with your advisers periodically to make sure plans still fit your farm’s situation.
It’s not a fast process, but transition planning could be what protects your farm in the future. If you don’t have a transition plan in place, start with identifying your goals, then move forward with more formal planning.
“We wanted to keep the actual running of the farm in the hands of those on the farm while keeping land in the family,” Maple says. “We have a lot of meetings to strategize how we want [the transition] to look and you can’t do that standing by the tractor.”
They hope to not only keep farm ground in the bloodline, but also make it easier for younger generations coming onto the farm.
“We’ve transferred our original corporation to just land holding now and started a partnership with [some relatives],” Maple says. “We’re in the process of buying out the machinery from the original corporation.”
Buying out machinery, grain bins and other equipment from the original corporation means more of the day-to-day material and decisions will be in the hands of those actually working on the farm. Eventually the corporation will own only land that will be rented to the partnership.
“They decided to leave the land inside an entity so that it’s easier to operate without making shareholders individual owners of a small piece of land,” says Trent Wolfe, accountant for Maple Farms. “Now the operating entity writes a check to the land entity for rent each year.”
Prior to reorganizing, shareholder dividends were invested back into the farming operation. Now, shareholders will have the opportunity to receive dividends from renting land to the operating partners.
Farmland is less likely to leave the Maple family with this new structure. Instead of worrying about individual owners backing out of small plots of land, the family keeps everything together in a larger entity and has more power to buy out family members who want out of the business.
“The main purpose is to keep the land together as shareholders pass away,” Wolfe says. “Before, the entity would have to buy out every shareholder and that was going to be too expensive.”
Shareholders now have more incentive to stay in the business with dividends, and their family will receive those benefits when they pass away. “Hopefully this makes them want to pass it down to their kids,” Maple says.
With any changes to your farm operations, make sure you consider tax and cost considerations.
“We looked at changing from a C corporation to an S corporation,” Wolfe says. “Once we consider those options we wanted to discuss how this income reported in the corporation affects all shareholders since before there were no income consequences when it was a C corporation.”
Scott Maple and Wolfe explained changes and answered questions about tax implications at a shareholder meeting. Shareholders received a letter prior to the meeting so they could come with questions. Because members will receive dividends for the first time, it will affect their income and potentially their tax bracket.
“Sometimes things will cost you either way,” Maple says. “We’ve been upfront with everyone about it.” He says though there might be a tax penalty on the front end, the long-term benefits outweigh the costs.
Seven Tips to Starting a Transition Plan
Transition planning can be intimidating to jump-start. Here are a few tips from the pros to help you begin:
- Keep your records well organized.
- Know your goals for the farm, both long-term and short-term.
- Be very open and honest when working with transition advisers to ensure you meet your goals.
- Understand tax implications with each change you make.
- Work with advisers you trust to know your business.
- Communicate with family and stakeholders throughout the process so there are no surprises.
- Recognize a transition plan needs to be a living document and will change as family situations change, the law changes or the value of assets changes.