Ted (01:31.7)
Imagine spending your entire life building a farm, pouring your heart, soul, and countless hours into the land, only to see it all unravel due to poor planning. It's a heartbreaking reality for many farm families across Ohio and beyond. Without a succession plan, family farms can be torn apart by disputes, unexpected taxes, and confusion over ownership. Succession planning just isn't about passing down land.
It's about preserving a legacy. It's about ensuring the work you've dedicated your life to continues and flourishes in the hands of those you love. Hello, everyone. I'm Ted Gudorf, a board certified estate planning attorney in Dayton, Ohio. And today I want to talk about how you can secure your family farm for future generations and why taking action now is critical. Retirement is not a concept that most farmers consider.
especially those from the baby boomer generation. Farmers are different from the rest of the working population. They don't see an end point to their careers oftentimes. A recent survey found that 18 % of Iowa farmers never plan to retire, while another 52 % only intend to semi-retire. For many farmers, it's not about reaching a finish line. It's about staying active, maintaining a connection with the land, and doing what they know and love.
This mindset makes succession planning a challenge because it's difficult to think about transferring control of something so integral to one's identity. The desire for control is one of the main reasons succession planning gets pushed to the back burner. Farmers like to maintain control over every aspect of their work, from what crops to plant to how to manage the finances.
It's their livelihood, their way of life, and it's not easy to let go of that control. Many farmers can't imagine someone else running things, even if it's their own children. This hesitation is completely understandable. After all, many farmers have held onto their land through years of hard work, often inheriting it from their own parents or grandparents. And the idea of handing over control can be emotionally taxing. However,
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While holding onto control is natural, it's essential to face the facts. None of us have figured out how to avoid the inevitable. We all have to face our own mortality at some point in time. And the question becomes, what happens to the farm when we're no longer here? If there is no plan in place, the family is left to deal with the uncertainty. And this often leads to disputes and conflicts. Emotions run high after death.
and grieving family members are not in the best state to make crucial decisions about the future of the farm. I've seen it happen firsthand. Family members arguing about who gets what, even on the day of the funeral. It's a painful experience that no family should have to go through. That's why it's so important to have a succession plan in place ahead of time.
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The reluctance to plan isn't just about holding on to control. It's also about the mental work involved. Succession planning requires facing uncomfortable topics like death, family dynamics, and finances. It also means dealing with legal and tax issues that can be complicated and overwhelming.
Many farmers feel out of their depth when working with lawyers and financial advisors who use jargon and concepts that seem foreign. By the time you've wrapped your head around one point, the conversation has already moved on to the next, and it's easy to feel lost. This frustration often leads to inaction. But the truth is, finding a professional who takes the time to explain things in simple terms can make all the difference. Another fear that prevents farmers from planning
is the belief that circumstances will change, making the plan obsolete. Sure, life is unpredictable. People get divorced, family members pass away, and financial situations evolve. Farmers often worry that the plan they make today won't fit the reality five or 10 years down the road. But here's the thing. Plans are not set in stone. They can and should be updated as circumstances change.
It's far better to have a plan that evolves than to have no plan at all. Without a plan, you leave your family to navigate a legal and financial minefield, and the consequences can be devastating, not just financially, but also emotionally.
A solid succession plan for your farm involves more than just writing a will. It's about ensuring the right structures are in place to facilitate a smooth transition of assets, minimize taxes, and maintain the farm's operational efficiency. There are several key components to a successful farm succession plan, and the first one is creating the necessary life documents.
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These include health care powers of attorney and financial powers of attorney, as well as advanced directives, otherwise known as a living will. These documents ensure that someone you trust can make decisions on your behalf if you become incapacitated. A health care power of attorney designates others who will work with doctors to determine your care if you're unable to do so. While a durable financial power
attorney allows someone to manage your finances and pay your bills. These documents are critical because they ensure that your wishes are respected and they provide clear direction for your family during a difficult time. Next is the estate planning aspect of succession. This involves using tools like wills, trusts, and business entities such as LLCs or limited liability companies to ensure the orderly transfer of assets.
A will is a basic document that outlines who will inherit your property. It is only effective upon death, but it's not always sufficient for complex farm operations. Trust, on the other hand, can be more effective tool, particularly if you want to avoid probate and provide clear instructions on how the farm should be managed without the interference of probate court being involved. A revocable living trust, for example, allows you to retain control of the assets during your lifetime.
while ensuring they pass smoothly to your heirs without the delays and costs associated with probate. Irrevocable trusts, on the other hand, can be used to protect assets, whether it be from estate taxes, the nursing home, or creditors, which can be particularly beneficial for farmers with significant land holdings. Another important component of farm succession planning is business succession. If you're fortunate enough to have a family member
who wants to take over the farm, it's crucial to set them up for success. This means structuring the farm's finances in a way that doesn't burden the next generation with excessive debt. One of the biggest challenges for farming families is ensuring fairness among heirs while also maintaining the viability of the farm. If you have multiple children, but only one is interested in farming, dividing the assets equally may not be practical.
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The child who stays on the farm should be compensated for their sweat equity, the years of hard work they've put into the operation. This doesn't mean that other heirs should be left out, but it does mean that fairness doesn't always equate to equality. Consider this. If you have four children and only one has been working on the farm, giving each child an equal share of the farm could put the on-farm child in an impossible financial situation. They may need to buy out their siblings.
which could require taking on a significant amount of debt. This was a common scenario during the farm crisis of the 1980s and led to many farms going under because the next generation simply couldn't handle the financial burden. To avoid this, it's important to think about how to structure the inheritance in a way that allows the on-farm child to continue farming without being overwhelmed by debt. One approach is to give the on-farm child
credit for their contributions over the years. For example, some families use a rule of thumb where the on-farm child receives an additional percentage of the farm for each year they've worked on it. This recognizes their contributions while still providing for the other heirs. Communication is a critical part of the succession planning process. It's not enough to have a plan. You need to make sure that everyone involved understands it.
This means holding family meetings to discuss the future of the farm, the roles each family member will play, and the expectation for how assets will be divided. These conversations can be difficult, especially when emotions and family dynamics are involved, but they are essential to avoid misunderstandings and conflicts down the road. I've seen far too many families torn apart because they didn't have these conversations ahead of time.
One sibling feels they weren't treated fairly and suddenly the family is in court with relationships shattered beyond repair. Having open, honest discussions now can prevent that kind of heartbreak later.
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A successful farm succession plan involves several steps. And the first one is starting the conversation early. The earlier you begin planning, the more options you have and the smoother the transition will be. Don't wait for a health crisis or another major life event to start thinking about succession. By then, it's often too late to make the best decisions. Once you've decided to start planning,
The next step is to assemble a team of professionals who can help you navigate the process. This team should include a lawyer, a financial planner, and a tax advisor who understands the unique challenges of farm operations. These professionals can help you create a plan that addresses all the legal, financial, and tax issues involved in transferring the farm to the next generation.
Defining roles and goals is another crucial step in the planning process. This means deciding who will take over the farm, how the transition will work, and what the long-term goals for the farm are. For example, do you want the farm to remain in the family indefinitely, or are you open to selling it if circumstances change? Clarifying these goals can help guide your decision and ensure that everyone is on the same page. Once you've defined your goals,
you'll need to use the right tools to achieve them. This might include setting up trusts, maybe multiple trusts, perhaps creating limited liability companies or corporations, or using conservation easements to protect the land while providing tax benefits. Documenting and communicating the plan is also essential. Once you've created the plan, make sure it's in writing and that all family members understand.
This helps prevent misunderstandings and ensures that everyone knows what to expect. Finally, remember that a succession plan is not a one-time event. It's a living document that should be reviewed and updated regularly. Life is unpredictable, and your plan should reflect changes in your family, finances, your goals, and even changes in the law. Reviewing your plan every few years or after major life events
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can help ensure that it remains relevant and effective. It's also important to consider the role of tax planning in your succession strategy. Taxes can significantly impact the transfer of your farm. And without careful planning, your heirs may face a heavy financial burden. Estate taxes, gift taxes, and capital gains taxes can all come into play when transferring farm assets. Utilizing
tools such as trust, gifting strategies. Limited liability companies can help minimize these tax liabilities. For example, placing the farm in a limited liability company allows you to transfer ownership gradually over time, reducing the tax impact while retaining some control over the operation. Gifting portions of the farm to your heirs while you're still alive can also be an effective strategy, especially at the value of the farm.
exceeds the federal estate tax exemption. In 2024, that estate exemption is very high. We have to keep our eye on it to see if it gets reduced in the ensuing years. But by taking advantage of annual gift tax exclusions, you can transfer parts of the farm without incurring a tax. That helps reduce the overall value of your estate. Another tool that can be valuable in farm succession planning is conservation easements.
Conservation easements allow you to protect the farm from development while also potentially providing tax benefits. By placing a conservation easement on your land, you can ensure that it remains dedicated to agricultural use, preserving it for future generations. Additionally, the value of the easement can provide a charitable deduction, which can help offset some estate taxes. This can be particularly beneficial for families
who want to maintain the agricultural nature of the land, but may not have heirs interested in actively farming it. Insurance can also play a key role in a farm succession plan. Life insurance, for example, in particular, can provide liquidity to pay estate taxes or to buy out heirs who are not interested in farming. For example, if one child wants to take over the farm and others do not, life insurance can be used to provide a financial inheritance
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for the non-farming heirs, allowing the farming child to retain ownership without having to take on additional debt. This approach helps ensure fairness among heirs while maintaining the viability of the farm. It's also worth considering disability insurance, which can provide income in the event that you are unable to work due to injury or illness, ensuring that the farm's operations can continue uninterrupted.
Planning for the unexpected is a critical aspect of succession planning. Life is full of surprises, and having a contingency plan in place can help your family navigate challenging situations. This might include designating a successor in case the primary heir is unable or unwilling to take over the farm, creating a buy-sell agreement to outline what happens if a partner wants to exit the business.
or establishing an emergency fund to cover unexpected expenses. By thinking through these scenarios ahead of time, you can provide your family with a roadmap for dealing with the unexpected, thereby reducing stress and uncertainty.
Training and mentoring the next generation is another important part of ensuring a successful transition. It's not enough to simply designate an heir. You need to make sure they have the skills and knowledge necessary to run the farm effectively. This might involve working side by side with them for several years, gradually increasing their responsibilities, or encouraging them to pursue education in agriculture or business management.
By providing hands-on experience and guidance, you can help ensure that the next generation is prepared to take over when the time comes. It's also important to involve them in the decision-making process early on so that they understand the complexities of running the farm and feel confident in their ability to do so. Succession planning is about more than avoiding chaos. It's about honoring your legacy
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and ensuring the future of your family farm. Without a plan, you leave your family vulnerable to disputes, financial hardship, and uncertainty. By taking action now, you can create a clear, fair path for the next generation. In the next video, we'll dive into a real-life case study of farm estate planning. You'll see how thoughtful planning made all the difference for one family and their farm's future. It's a much-watched for anyone serious about it.