Building a Farm Succession Plan

Sweat equity is something that shouldn’t be overlooked

As an attorney and Extension Outreach Specialist for Iowa State University, Melissa O’Rourke has helped countless farmers plan for their farm’s future. Through that experience, she has put together a quick-start guide that every farmer should have in place whether transition is on the radar, or not.

In the latest CoffeeTalk, we sat down with Melissa to learn about the opportunities that exist within every community to begin putting a plan in place for both farm financial and legal security.

“Keep everyone engaged and involved as much as they want to be,” Melissa shared. “If you keep everyone involved in the planning and decision making, no one feels left out and there are no hard feelings. This might look like a monthly Sunday Zoom call—whatever it takes.”

O’Rourke says that keeping family members and land owners engaged, at any level helps to keep everyone involved in the farm vested and up-to-date on what is going on.

Communication, she says, is the key to keeping a vision on track.

In addition to keeping everyone on the same page, O’Rourke says that there are four other fundamentals that every farm, no matter the size, scale or scope should keep in mind.

Fair doesn’t have to mean equal.

“There is value in sweat equity and fair doesn’t have to mean an equal division of the farm,” she says. “Keep in mind those family members who stuck around and helped, who have been involved in the day-to-day. If you want to keep the farm operating as a farm, dividing land amongst heirs who have no interest in farming make that goal more challenging. I always recommend dividing cash or other assets.”
She says that she encourages people to remember that 80% of the American population receive no inheritance, among the 20% who do receive inheritance, the median amount is $49,000.

“If your goal is farming, keep that goal top-of-mind,” she says.

Inventory

Before an estate can be divided or passed on, inventory has to be assessed.

“When you are talking about dividing an estate, look beyond farmland. Use the sweat equity and those who stuck around to help you keep the farm going to position your farmland. Keep the farm a farm and divide your inventory assets to offset amongst other heirs,” O’Rourke says.

In order to accomplish this, an operation first has to assess liquidity and inventory. Additionally, an operation must know how it owns inventory—joint tenancy, individually or tenancy in common?
O’Rourke asks those she works with to consider, first, how real estate is owned, followed by bank accounts, CDs, investments and other intangible assets.

“Don’t forget life insurance policies when you are figuring you assets. What type of policy do you hold and will it cover any debts that are outstanding? Who are the beneficiaries?” she says.

Finally, pensions and tangible properties should be valued and added to the tally.

Substitute Decision-Making

“Who will make decisions for your well-being when you can’t,” O’Rourke asks? “What happens when you can’t speak for yourself to make your own decisions?”

These are questions that should be answered now, rather than later, she says, and should provide peace of mind.

There are several types of substitute decision-making avenues with the most popular being Power of Attorney (POA) and Health Care Planning and Directives- a simpler form of a POA that can be acquired at a hospital in a time of crisis.

To break each down, O’Rourke shares:

POAs should be used for financial and business matters, but can also be used for medical and healthcare decisions- a full directive of guidance for both financial and health.

Health Care Directives, on the other hand, are express wishes for end-of-life care and do not include any business or financial guidance.

Build a Professional Team to Help Guide Your Planning

Finally, O’Rourke says that a professional team is something that all farmers should consider having in place.

At minimum, a professional team should consist of financial, legal and tax professionals. A well-rounded team will also include a go-to insurance, real-estate and, perhaps, even spiritual guidance that is only a phone call away.

The professional, O’Rourke says, that is met with the most skepticism and reluctance is the attorney.

“You don’t question having an accountant because you know that you need an accountant at least once a year,” she says. “But what about an attorney? Do you want to make the decision to hire an attorney, on the fly, in a time of crisis, or do you want to find a legal professional who works best with you and understands your goals and your farm’s goals?”

She shares that while visiting with an attorney is often misconstrued as costly and unnecessary, nothing could be further from the truth.

“You should be visiting with your attorney once a year, just like you visit with your accountant. Keep him or her up-to-date on what your goals and plans are and use it as a check-in to ensure all of your legal paperwork is current and in-place,” O’Rourke says.

O’Rourke shares the resources that help guide a farm through each of the principles and how to reach out to begin to build a professional team, as well as, more on these five principles of a well-rounded operating plan, and more, is shared in our pre-Christmas CoffeeTalk.