Generations should work together to plan for future
August 12, 2013
In a recent webinar, Merle Good, Alberta Agriculture and Rural Development, spoke on farm and ranch succession. Is it an impossible dream? Perhaps for some, but Good offered some advice on transitioning the farm or ranch to the next generation.
"We've had a large increase in young people wanting to come back to the business," he said.
Despite an eagerness to come back to the business, there are some serious considerations that might determine success or failure for these young producers. Good used real-life examples to illustrate his points.
"The family farm is a real puzzle," he said. "Families need to focus on the viability, expansion and transition of the business, and focus less on the personal wealth side. Parents need to retire more on redemption of equity from the business."
“The family farm is a real puzzle. Families need to focus on the viability, expansion and transition of the business, and focus less on the personal wealth side. Parents need to retire more on redemption of equity from the business.”
Merle Good, Alberta Agriculture and Rural Development
Good explained the difference between operating assets and personal assets and how families should separate the two.
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"Operating assets would be cattle, equipment, inventory, operating death, along with the costs and risks associated with ranching," he explained. "Land, however, is a personal asset, as well as insurance and investments; the operating assets need to be handled differently than the personal wealth. Even though the land is treated as a personal asset that might be distributed to on- and off-farm children, as long as it's accessible to the ranch, that is fair."
Next, he discussed transitioning land to on- or off-farm children.
"Remember, there is a difference between having access to the land and owning it," he said. "The on-farm child can have first choice to buy from the off-farm sibling. The on-farm child can rent it, as well. They can have access for a number of years until they can find someone else's property to rent or buy. When you transfer ownership, it doesn't mean it has to be one hundred percent clean."
Once a will is read, it can sometimes cause troubling sibling disputes. Before getting upset, he suggests embracing the decision of the parents, instead of fighting it.
"As an on-farm child, I would rather have a viable business even if my off-farm siblings own the land. I would rather embrace it and have access to the land than fight it and have my sibling sell off the land," he said.
He added that family meetings are "crucial." He said it might seem like everything is set in stone, but regular discussions can help keep everything on the same page.
"In my own situation, my parents took a life estate, so he would control the property through his lifetime. This allowed him to collect the cash rent and have an income stream for the rest of his life. What I got was ownership, plus control, once the life estate ceases to exist. The concern is that bankers don't like to loan out to the child in this situation, but it did allow both of us to own the quarter at the same time."
South Dakota State University (SDSU) Extension Gerontology Field Specialist Leacey Brown writes for SDSU's iGrow that, "The difference between estate planning and retirement planning is subtle, but important. Retirement planning involves planning a person's financial future once they are no longer employed full time. Estate planning involves determining what will happen to a person's property and financial resources in the event of death or incapacitation."
The website has resources for ranching families to utilize including information for legal services, wealth transfer professionals and a checklist of tasks to complete when estate planning including: creating and maintaining a will, creating a trust fund, assigning a guardian for living dependents, naming an estate executive, updating beneficiaries on plans (life insurance, IRAs, 401Ks), funeral arrangements, and setting up a durable power of attorney.
Certainly, there is much to consider when transitioning the ranch operation. Every outfit has its own unique set of circumstances and challenges, and waiting until the last minute to make plans is ill advised if the ranch is to have a chance of transitioning to the next generation.