Control of Farm Management Decisions

Earlier we discussed the importance of transferring management to the successor generation. However, we did not delve into the details of making this transfer successful. To help with this process the University of Wisconsin – Madison Division of Extension Farm Succession educators developed the Control of Farm Management Decisions Worksheet. This worksheet allows the farm owner and successor to rank how important the following are to them: To be involved in the daily operation of the farm business? To be involved in the production decisions for the farm business? To be involved in the marketing decisions for the farm business? To maintain some financial control of the farm business? Once each generation has identified how important the above items are to them today, they are asked to think about how important they may be in 3 years and in 5 years. Once the ranking has been established it is time to talk about what is most important to the owner and most important to the successor. The owner and successor can then utilize the rankings they provided to work on the “Planning Transfer Control” page of the worksheet. If marketing the farm’s soybeans is not very important to the owner generation but it is to the successor then this should be listed as a management decision that will be transferred immediately to the successor. Working on each management decision by order of importance gives the two generations the ability to develop a transfer plan that allows each to hold on to what they feel is the most important, and to make compromises about others. When working through developing a plan to transfer management decisions it is important to realize that management decisions should be transferred incrementally. In the worksheet the owner and successor can select what will be transferred in a year, in two years, and in three years. Having a framework of when management decisions will be transferred will give both the owner and the successor generations peace of mind. Through the incremental transfer of management, the owner generation can gain confidence in the successor generations ability to make decisions that will result in the continuation of the farm the business and their legacy. The successor generation gains confidence in their farm management decision making while utilizing the safety net of the owner generation. At the end of the transition period, the successor should feel confident in their ability to make management decisions in all aspects of the farm business. Additional Resources: “Cultivating Your Farm’s Future” workbook and companion guide. This workbook contains invaluable tools to help with your farm’s succession planning. Authors

Fair vs. Equal Strategies for Asset Distribution

Recent farm succession research by UW-Madison Division of Extension educators indicates that the division of assets for inheritance is a common tension around farm succession planning. This study found that 54% of participants felt stress over how assets were divided. The participants’ comments regarding this stress were grouped into five main categories, business risk, sibling harmony, emotions, personal risk, and treating assets strictly as inheritance and not as business assets. In some cases, the tension can be so great that the owner generation avoids making a decision until it’s too late which may allow their assets to default to the state’s plan, which typically mandates dividing the assets equally between the children. If the goal is to continue the farm to the next generation, dividing the assets equally may jeopardize that. Oklahoma State University has created a statistical model that compares various transition strategies and their probabilities of success. The results demonstrate that the most common farm succession strategy of dividing the assets equally among all heirs has the lowest success rate. Farms employing this strategy normally do not continue to the next generation 1. Making decisions and following through with them can alleviate the successor’s worry about their financial ability to purchase the farm assets. Having a succession plan allows the successor to prepare for ownership of the farm assets, whether it is through inheritance, purchase, lifetime gifting, or a combination of the three. Solidifying the owner generation’s goals and priorities for their retirement needs and estate plan, allows them to better communicate these goals to the heirs and/or business successors. Service providers, such as attorneys, accountants or other professionals can use these goals to tailor their suggestions and strategies to better fit the needs of the family. An overview of the following tools and strategies is provided to help owners and successors become familiar with these options before meeting with planning professionals. Familiarity with these tools and strategies will give owners and successors a better understanding of the strategies as they discuss them with professionals. Farm families may want to consider a combination of these strategies to fit their unique asset distribution needs. Unequal Gifts of Essential Business Property Owners of the farm business may choose to transfer the essential assets of the business to the on-farm heir. These assets may include livestock, machinery and equipment, tools, and buildings that are critical to the business. For a business to survive, these things may need to be passed on to the business heir even if this means the business heir inherits a larger percentage of the parent’s assets. Estate planning tools (Wills, Trusts, and ownership of property) Wills are a set of instructions for the distribution of assets at the time of death. Wills are easily changed, and assets distributed through a will are subject to probate. Probate is the court process of validating the will. The instructions in the will can distribute assets however the owner deems appropriate and can set parameters for the purchase of assets between heirs. Parameters could include a set price, a formula for a price, and an interest rate if a purchase is done over time like a land contract. The instructions may also include that assets be available for the on-farm heir to rent for a set period of time. A trust is a legal entity that has the power to hold assets. Trustees and beneficiaries need to be identified for each trust that is created. A set of instructions would be developed outlining who makes decisions for the assets and who receives the assets or the benefits generated by the assets after the owners pass. Assets in a trust are not subject to probate, unlike assets that are transferred by a will or by the state’s default plan. Depending on the type of trust, the date the trust was implemented, and the trustees and beneficiaries chosen, a trust may provide some protection against Medicaid Recovery in Wisconsin. Any assets moved to a trust would still be subject to the Medicaid programs “look back” period or may still be considered the owners’ assets, despite being held in the trust name. For more information about Medicaid Recovery visit: https://www.dhs.wisconsin.gov/medicaid/erp.htm and https://www.pa.gov/en/agencies/dhs/resources/medicaid/medicaid-general-eligibility.html The way the property is owned or titled may have a bearing on how it is distributed. For example, if property is owned as tenancy in common, and one of the owners dies, the deceased’s interest is transferred to his/her heirs. Joint tenancy exists when two or more persons own the entire property with the right of survivorship. This means that at the death of one joint tenant, his or her interest passes directly to the surviving joint tenant(s). It does not become a part of the decedent’s probate estate. Therefore, it cannot be controlled by his or her will and is not subject to creditors’ claims against the estate. The last surviving joint tenant becomes the sole owner of the property2. If one is unsure of how property is titled and owned, a consult with an attorney can be helpful. Business Entities as Transfer Vehicles Corporations, limited liability companies (LLCs), and limited partnerships may be an option to transfer business assets to the on-farm heirs. The assets in the entity could be transferred to the successor over time allowing the owner and successor to co-own the entity. The transfer of ownership could be achieved by selling shares of the entity in the case of corporations or interest or units in the case of LLCs. The owner could choose to gift ownership of shares, interests, or units to the successor. The purchasing or gifting of shares, interests, or units guarantees the essential business assets are in the appropriate hands. The entity can also have language in the operating agreement or legal documents as to how the owners’ shares or interest are to be transferred at death. It is important to consult with an accountant or tax professional regarding gifting and sales transactions that may have tax consequences. Purchasing Agreements There are many different types of

Divorce and the Farm

When discussing succession and estate planning, we usually focus on ensuring the farm passes on to the next generation before or after the current operator’s death. Although the hope is that every marriage is successful and lasts until the spouse’s death, divorce can happen and create issues for a succession plan. A divorce may cause one of the parties to the succession plan to have to buy out a divorcing spouse if issues are not resolved before the marriage or during the marriage’s life. Succession planning can also be useful if a party to the plan gets divorced. Tools such as prenuptial agreements and postnuptial agreements can help prevent issues that could arise regarding how assets are distributed during a divorce and impact a farm succession plan.  Marital v. Non-Marital Assets In Pennsylvania, marital assets are subject to equitable distribution in the event of a divorce. It’s important to note that the law requires equitable distribution, not equal distribution. Equitable distribution can often become equal, but it may not always.  With equitable distribution, the court can consider several factors, including the length of the marriage, the opportunities for the parties for future wealth acquisitions, the standard of living during the marriage, tax implications, and more.  Those factors can be found in 23 Pa. Cons. Stat. § 3502(a).  To determine what assets would be subject to equitable distribution, we would need to determine if the property was acquired during the marriage or the increase in value of property acquired before the marriage. Property that would be excluded would be gifts, except for gifts between spouses, property taken under a will to one party, and property acquired after the divorce is filed.  Let’s consider a scenario where Taylor and Travis each owned 100 acres of farmland before marriage. Each farm is worth $600,000. After their marriage, they invest in a dairy farm and significantly improve their farmland. The improvements raise the farms’ value to $800,000. In this case, the dairy farm and any increase in value, here $200,000/farm, to their respective 100 acres would be considered marital property, as they were acquired or improved during the marriage.  At the same time, both are still part of respective family farming operations.  What can Taylor and Travis do to prevent loss in their respective farmland, or can one continue on the dairy farm in case of a divorce? Prenuptial and Postnuptial Agreements The first thing that should be considered is a prenuptial agreement. A prenuptial agreement is a legal agreement between the two parties before marriage regarding handling assets brought into the marriage.  This agreement is a good way to limit risks to family farmland or other farm assets before marriage and prevent issues in distributing those assets in the event of a divorce.  These agreements can be structured in ways that allow the spouse to be integrated more and more into the existing agricultural operation as certain milestones are hit, potentially the length of the marriage. To be valid in Pennsylvania, both parties must enter the prenuptial agreement voluntarily before the marriage.  At the same time, the parties need to have adequate knowledge of the property and financial obligations of the other party. It’s crucial that both parties seek legal representation when negotiating these agreements. This ensures that all aspects are considered and the agreement is fair and comprehensive. At the same time, the parties can voluntarily waive in writing any right to disclosures of the property and financial disclosures of the other party. What if Taylor and Travis did not consider a prenuptial agreement before marriage?  Pennsylvania law allows for the couple to consider a postnuptial agreement after marriage.  A postnuptial agreement is a legal agreement between spouses on what assets remain outside of marital property and what assets are considered marital assets.  The agreement operates similarly to a prenuptial agreement but is entered into after marriage.  In the case of a postnuptial agreement, the parties should talk with legal counsel to ensure the document is valid when drafted. Postnuptial agreements can often be used as couples mature together.  For example, if Taylor and Travis married in their early 20s and entered a prenuptial agreement that considered assets they brought into the marriage, those assets and goals may have changed over time as they entered their 40s.  A postnuptial agreement that modifies the prenuptial agreement would allow the couple to contemplate what has changed over the marriage.   Both documents can also be integrated into farm succession plans that contemplate an heir taking over an operation. For example, if Taylor is going to take over an existing farm from her family, the prenuptial agreement would be a way to ensure that limited issues will arise if she gets divorced. At the same time, if Travis becomes active on the farm and helps the farm grow over time, the family may want to consider a postnuptial agreement to modify the prenuptial agreement to consider how the situation has changed.

Forgive Generously

I’ve been married 36 years and am still learning what makes a good marriage. Recently while traveling I listened to a podcast, Bob Lepine author of Build a Stronger Marriage was sharing insights. He shared late speaker and author Gary Smalley’s most important marriage advice, learn how to resolve conflict and forgive. In fact, be a generous forgiver. I realized it was not only good guidance for marriage but for everyone especially farm families. Conflict Working together in hectic and stressful farming situations can create conflict and misunderstanding for the most loving farm families. Sprinkle in an unexpected financial challenge or equipment breakdown and the calmest person will be agitated. A child psychologist once told us, they act out more at home because they feel most comfortable there. I’ve found it to be true for people of all ages. It’s not all beautiful sunsets and pretty green hayfields on a farm there are disagreements too. How they are handled makes a difference. Assumptions Often disagreements and grudges are a result of an assumption. Assumptions are not necessarily true. It is best to ask the person instead of presuming you know what they are thinking or blaming an action on the person. Sadly, I’ve witnessed farm families broken apart by assumptions lacking facts to prove validity. One or more people are “sure” they know who caused an issue, but there’s no way to prove or disprove it. The accused said they didn’t do it, but still the grudge wears on causing separation in the family. Resolve Conflict Gary Smalley didn’t say if conflict occurs, he said learn how to resolve conflict. He knew arguments were a given in marriage and it’s also a given in farm families. Since it’s a given, the best option is for farm families to learn how to talk through the issues and resolve the conflict. Compromise may be required in order to come to an agreement. Forgive Generously The term indicates a need to forgive freely, not begrudgingly. In fact, the biblical example of 70×7 comes to my mind and I am guessing Gary Smalley was thinking of that too. Forgiving generously requires us to completely lay down the wrong or the assumption, etc. and never pick it back up. If we do, we need to consciously let it go again, as many times as it takes. Family Held to a Higher Standard Those who forgive strangers ought to also eagerly forgive family members. Afterall we are called to forgive both. Many farm families refuse to acknowledge direct relatives for various reasons. The same people will agree generous forgiveness is a great marriage tip and confirm the biblical 70×7 example. Farm families are not exempt. It appears the expectation of family is perfection and unfortunately people aren’t perfect, and things happen. Family is too precious. Don’t give up the ability to communicate and cherish blood relatives because of hurt feelings, conflict, or old issues. Begin the conversation and the healing today, swallow your pride and take a step forward to mend broken relationships and begin the forgiveness process. 

Every Family and Farm Have a Story

Why Is the Story Important? Remember sitting at a family gathering and hearing family members share stories from their childhood or grandpa sharing stories when you visited. Different times of the year brought different memories to mind. Some repeated often, even to the point of being annoying. Until the person was not there to share them anymore then the value of those stories soared. At that point, the details were lost if not written down and questions came to mind that could no longer be answered. The details a necessary piece of the farm and family puzzle. History, especially items talked about the least, played a crucial role in people’s actions and possibly the farm’s history because for farm families it’s all intertwined. Understanding the history helps us address and work through the tough stuff as well as embrace the victories. But I’m Not Family Farmers have an incredible close tie to their farm. After all, the farm is where both family and farm have happened. Transitioning a farm outside of the family can feel a bit like betraying one’s family and the sweat equity everyone who came before them put into it. Therefore, even if you’re not family, it’s important for you to embrace the topic and learn all you are able to about the roots of the farm you want to take over. You are the only one who can ensure the farmer and farm family that the history of the farm will not be lost at the signing of a sales agreement. It’s at this crossroad that you realize you must invest in the history of the farm as well as the land and buildings in order to have a successful farm transition. An Impact to Work Through The tough stuff is likely the things that had the largest unspoken impact on a farm. A very traumatic death of a child during birth in days when counseling was not available. The only recognition flowers lovingly placed on the baby’s grave every Memorial Day. A small marker placed on the grave in later years when money was available or maybe when the farmers realized the need to publicly acknowledge the loss. The couple lost one child; they could not bear losing another. Thus, when their only child, a son, shared an incredible job opportunity with a large farm he was told if he left the family farm he could never return. Realistically they would have welcomed him back with open arms but instead they gave a tough front, and that young man lived his life with an underlying regret and anger issue because of it. Understanding the challenges previous generations faced create opportunities for empathy, healing and ensuring the hurts are laid to rest and negative cycles broken. Celebrate the Positive Impact Grandchildren loved the stories shared by others about their grandparents. The animals they purchased from them and stories of farm visits. A plethora of the people still in the ag industry today, remembering a positive start made possible by one family farm. The positive stories give reason to celebrate and encourage the next generation of farm stewards to develop a mission not only for the farm but also a plan to positively impact people in a way that best fits the next generation. Skipping family and farm stories leaves a missing piece in the transition puzzle.,

Work Life Balance

We just finished our farmers’ market season. We are ready for a break. A break from extra early Saturday mornings and my husband working every night restocking the market trailer after working outside on the farm all day. I often spend evenings entering inventory or writing the newsletter. Therefore, the title of an old article I ran across struck me as important and something we could use a refresher course on. The article was about work life balance. It’s hard for those of us that come from what I refer to workaholic families. The unspoken rule was the more work you do the better. Family vacations could be counted on one hand with fingers left. This is not a good habit nor is never leaving the farm something to be proud of. Let me share what I learned from the article Robert Milligan of Dairy Strategies LLC wrote. Robert suggested four reasons for working “too” much. Our financial status doesn’t allow opportunity to hire sufficient labor to enable us to work reasonable hours. No one else is capable of doing the work we do. Time working is more urgent, even though not more important. There is nothing important to do in non-work time. The first reason is a challenge for many, but it’s also used to justify the next two reasons. The last reason often happens because while we’re young and able to handle all the physical labor farming requires. We don’t realize the need for hobbies and off farm activities. Sometimes we must force ourselves to get off the farm to develop other interests and nurture hobbies. It’s important to do so in order to develop interests before we don’t have other things to pursue when we need to slow down because our bodies can’t keep up with farming or it’s time to transition the farm. Those of us who work too much believe subconsciously or consciously, or unintentionally or intentionally that we are the only ones that can do the job right. We need to get past this challenge. Here are four suggestions we can learn from: Make Life Balance a Priority Steve Covey (Seven Habits of Highly Successful People) developed a four-quadrant rectangle, which included: 1. Quadrant of crisis, the goal is to reduce the time spent on these items. 2. Quadrant of Quality, the goal to expand the time spent on these items. It includes everything important but not currently urgent. The quadrant includes many work activities such as leadership, management, training, coaching, and professional development. It also includes much of our personal/family time. Two other quadrants include: 3. Quadrant of Deception and 4. Quadrant of Waste. This is where unimportant activities are located. Items we are doing that do not have value or are wasteful of our time. These can be eliminated. Success requires expanding the time available for Quadrant 2 activities. This is done by making these items a priority, by setting aside time in our schedule for these things. The first step is the hardest, start small and expand the time little by little. Remembering time management is not about time but about priorities. Plan for Life Balance We need to be off work at 5 pm to meet family obligations or evening meal but always work an extra hour or more because there are always uncompleted tasks that need to be completed. Many of us do that, we work too much because we don’t have a plan to do otherwise. Some ideas to help in this instance are: Outline what needs done. Determine what can reasonably be done in the time available. Complete high priority tasks only we can do first, even if they are tasks we tend to avoid. Delegate tasks to others. Become more efficient with work time. Train Others to Complete Some of Your Tasks Employee management, failing to recognize employee capabilities can be a huge area potential loss on a farm. Sharing responsibilities spreads the burden of tasks to be completed over a larger group of people. Stop focusing on the weaknesses of employees and look for the strengths and potential. Based on employee strengths and potential, select one task you currently do that one or more employees can successfully complete. Develop a plan: Create employee(s) excitement for the task Provide required training Establish performance expectations Coach and provide feedback, including comparing actual and expected performance expectations. When the employee is successfully managing the task, select another task to transfer from our task list. Not only are we freeing up more time for Quadrant 2 activities, including personal time, but we are also increasing productivity and job satisfaction of our employees as we trust them with the activities. Enhanced Personal Efficiency Sometimes stepping away from an activity is the best way to become refreshed to return and accomplish what needs to be done. While working through long days and nights without a break creates burnout. Failing work life balance also creates a very inefficient work style. The next time we just can’t go anymore get off the farm and do something, anything to create more work life balance. We will come back to the task refreshed and renewed, even if it’s a short break. Good work life balance makes a person more efficient at work and happier in life. It’s like a lot of things we know we should do but often don’t take time. Its time work on creating a better balance for the sake of our family, our farm and ourselves.   

The Invasives Creep Up on Us

Every time I glanced at my flower bed; I saw them. Yet others didn’t. An invasive flowering plant had gotten away from me. Very early in the season I pulled some out, but I was in a hurry and didn’t get them all. Short on time I let it go. I knew I should address the issue by setting time aside to free my flower garden of them, but I didn’t. This morning as I was finally removing the invasive flower, I realized I had a very pretty lily that was almost snuffed out by the invasive. Thankfully it still has a few small blooms and was uncovered in time for the plant to regain its strength. As I was pulling weeds and the overgrown invasive the wise words of a renowned farm succession expert rang in my head. Attorney John Baker of Iowa State Beginning Farmer Center, often remarked, “You have what you put up with.” A simply yet profound statement of truth. Farm Invasives Not all of the invasives are in farm fields, hedgerows, or forests. They can be found in the financials, equipment, structures, employees, working relationships, family members and family dynamics, to name a few. They are items that we “put up with,” avoid addressing or ignore. However, as with all invasives the issues grow bigger and out of control if left go. Examples include: 1. Financials It often starts unintentionally when savings or personal funds are tapped to pay the bills. Thinking next year, we’ll catch up and get back on track. Debt increases and the conversations around farm financials are tense. It could be financials have never been a strong point but we’re too proud to ask for help. 2. Equipment Farm equipment can present safety hazards. Unaddressed safety hazards are accidents waiting to happen. Accidents harm people, livestock, equipment and result in potential for legal action. Time and dollars spent fixing farm equipment prevent down time when you most need the equipment, time spent in court or heaven forbid lifetime regret of loss of life. If the hazard cannot be fixed, it may be time to develop a plan to replace the equipment. 3. Structures Farms often have a wide array of structures from historic to newer and the challenges are as varied as the buildings. It’s easy to let building issues go because they are lower on the project list. Be careful the issues don’t become safety hazards or prevent the building from functioning as it should to safely hold livestock, feed stuffs, or equipment. 4. People Issues The messiest invasive of all are people issues. There may be communication challenges including personality struggles or conflict resolution issues. It may be a learned defensiveness or wall that’s been put up as the result of an abusive professional or personal relationship. There may be a toxic relationship among family members or employees that has gone unaddressed. Remember you have what you put up with and it’s time to deal with the issues and set boundaries. Bad behavior is unacceptable behavior. Removing the Invasives The first step is acknowledging the issue(s) we have to admit there is a problem in order to deal with it. Working together with others on the farm to address financials, equipment and structure problems will spread the burden and creative thinking among many people and often results in the best potential solutions. The best option for the farm may be the hardest to accept. The best option may require transitioning farm enterprises to a more financially feasible enterprise for the farm. A piece of grandpa’s farm equipment may need to be replaced because it’s too dangerous and someone is going to get hurt. A farm building from the 1930’s may have outlived the remodels and need replaced. Working together the farm team can determine the best options for the farm. The Root of the Problem If people issues are the root of the problem, they need dealt with first. If inappropriate actions have been accepted in the past it will take time and patience to change. Addressing issues one on one may be the best place to start. We may uncover someone dealing with personal issues/crises and the frustration from those are spilling over on the farm or vice versa. The person may not realize their words or actions are negatively impacting others and the farm. Things may also be addressed in the group setting of a farm meeting. The best way to ensure all know behavior expectations is to provide meeting guidelines and follow them. Reminders may be required throughout the meeting until everyone gets used to the new protocol. A prop may be used to ensure everyone is heard during the meeting. For example, if one person tends to dominate the meeting, pass around a small stress ball or other object and the person in possession of the item has the floor and the rest of us listen. Once they are done speaking the object is passed on to the next person. This also gives a voice to those who normally don’t speak up. Everyone listens to learn while others are speaking. The meeting facilitator or leader should remind people there are not any wrong answers and we should use our listening skills to learn other points of view. It will require practice to adjust but the method works. The Beauty of an Invasive Free Farm The best results occur when invasives are removed root and all. It’s also the most challenging method. Don’t get overwhelmed by the immensity of the issues. Set aside time to focus on one invasive at a time. As everyone’s voices are heard and positive results seen we will be motivated to continue the process to address other farm challenges. One step at a time we can get rid of invasives and renew farm vigor.

Financial Stress

Financial stress can be a major factor when running and growing your farm.