Get Busy Preparing the Next Generation to Manage

“I guess it comes down to a simple choice, really. Get busy living or get busy dying.” This famous line was quoted by Andy Dufresne, played by Tim Robbins, in the iconic movie The Shawshank Redemption, released in 1994.As we each traverse our lives, we all are presented with moments that make us pause and reflect on how precious the time is we have been given here on Earth. Every time I watch The Shawshank Redemption, I pause and think of the deeper message in this line. This being that you can spend your life going through the motions and waiting around for something to happen or you can make something happen.As we look at developing a plan for transitioning the farm to the next generation, are we waiting around for something to happen? Or are we working to make something happen? As farmers, we have to contend with and solve the day-to-day problems that arise on the farm. And there is never a shortage of problems that arise.Because of this, deeper planning functions, such as farm transition planning, are often pushed down the to-do list. So, what will be the trigger to make something happen with regards to your succession plan? What will be your trigger? One of the hypothetical questions we pose in farm succession workshops is: “What knowledge would you need to pass on if you knew you had only 2 months to live?” This exact scenario happened to our family in 2010 when my father was diagnosed with pancreatic cancer just as we entered into spring planting season on our dairy farm in Northeast Ohio. My father valiantly battled this disease but passed away 7 weeks later. Our family learned a lot and had to scramble to manage the farm in the midst of his illness. I am grateful for the short time we had with my dad to make preparations. But it was not long enough to learn everything we needed to know to run the farm without him. I challenge you to think how your farm and family would react to the loss of the principal operator. What knowledge and skills need to be transferred to the next generation so they can be successful? What can you do today to make something happen? Who will manage the farm in the future? As you develop your succession or transition plan, there are myriad decisions to be made. These decisions include identifying the next manager of the farm, how to be fair to off-farm heirs without jeopardizing the future of the on-farm heirs, how to distribute assets through the estate plan, how and when the owner generation will retire, and how the business will deal with unexpected issues such as divorce, disability, or paying for nursing home expenses. I would contend that the most crucial planning functions are to identify the next manager of the farm and then strategically plan how to develop them to lead the farm in the future. The first step is to identify who the next manager or managers of the farm will be. The successor generation could be an immediate family member (son, daughter, grandchild) or extended family member (brother, sister, niece, nephew). With that said, the next manager does not have to be from your family as some farms have transitioned successfully to a friend or neighbor. The key is to choose a successor who will be the best caretaker of the farm and land they will be entrusted with. As you review potential managers and heirs to your farm, it is important to talk with them about their vision for the future and how it aligns with the current farming operation. What are their goals and aspirations for the farm? What concerns do they have about the future of the farm? It is recommended to complete a skills assessment with each potential manager to examine their current strengths and the areas in which they will need to receive training in order for them to be a better manager for the farm in the future. Talk with them to learn more about what they would be most concerned or scared about if they had to take over the farm today. Are there additional responsibilities they would like to assume and what is their expectation for an appropriate time for management control to be transferred? It is suggested the new manager have time to experience how other farms operate. Having the future manager work on another farm prior to returning to the home farm is a valuable experience. Mentor relationships should also be developed for the new manager to have a trusted team to help them grow. Putting the Transition in Motion The transition can be accomplished gradually by turning over more responsibility and authority to the successor. In fact, this process may (and should) take 5 to 10 years. It is important to develop a timeline for transferring ownership, management responsibilities, and knowledge from one generation to the next. As the owner generation transitions their role and responsibilities to the next generation, thought should be given to the overall labor hours which will be available. In some cases, the responsibilities of two members of the owner generation will be transitioned to a single successor. Think of a husband/wife combination transitioning responsibilities to one of their children. This could cause a labor shortage. Could some tasks be outsourced to independent contractors (e.g., accountants)? Or could some production practices be accomplished through custom-hire arrangements (e.g., silage harvest or cattle breeding)? The biggest task in the transition plan is making sure the next generation has a firm foundation of knowledge to manage the operation in the future. This will look different for each farm and for the type of manager that is needed. If the next manager is going to be an owner-operator, then training will need to include how to manage all aspects of the farm. These include production skills to raise livestock and/or crop enterprises and marketing skills to effectively

Sometimes Right Isn’t Equal, Sometimes Equal Isn’t Fair

Introduction: The S Lazy H This chapter comes with prerequisite homework. If you haven’t listened to the song “S Lazy H” by Corb Lund, stop reading this chapter and go do it, right now.1 Listen closely to the lyrics.2 Lund stated in an interview that the song wasn’t one true story, but that it is “an amalgam of stories from people—it’s essentially a true story because it happens a lot.”3 Truer words have never been said. The “S Lazy H” sings a ballad of the challenges of trying to split up a working ranch between a child who wants to continue the operation, and an off-farm child who wants to realize the value of their inheritance—an undivided half share with their ranch sibling. Listening to the song can be an emotional experience for a farmer or rancher going through the transition process because the song is simply heartbreaking in its accuracy. Can an equal division of farm assets ever work? In “S Lazy H,” an on-farm ranching child (let’s call him “Farm Kid”) receives an undivided one-half interest in the ranch after their father’s (“Pa”) death and their mother’s (“Ma”) disability, with the other one-half interest going to their off-farm sibling (“City Kid”). City Kid wants to realize the value of the inheritance and wants to sell the ranch. Wanting to keep the ranch intact, Farm Kid tries to purchase the interest but “no cow-calf operation carries that kind of cash…I’m afraid I had to sell 20 sections of the S Lazy H.” Needless to say, the ranch doesn’t make it. But is the dissolution of a farm or ranch the inevitable result of splitting the operation into undivided interests? We sought to find out. Since finding real farms and ranches and tracking them through a generational transition poses a generational task itself, we tried the next best thing and simulated an operation with the best fidelity we could.4 Using Kansas Farm Management Association (KFMA) data from real farms to develop a “prototypical” winter-wheat/cow-calf operation, we defined an asset base of land, equipment, and livestock along with a balance sheet, income statement, and cash flows. Initially focusing on the southern Great Plains, a winter-wheat and cow-calf operation served as our representative farm. We then vetted our operation with several commercial agricultural lenders who confirmed that the operation represented a farm typical of a full-time commercial rancher. Then, using KFMA net farm income data spanning 20 years, we built a computer simulation that ran the farm through a 20-year period of the ups and downs in farm income. All of that laid the foundation for the centerpiece of the work: Could such an operation generate enough income to allow one Farm Kid who inherited a one-half undivided interest in the operation to buy out one City Kid’s undivided one-half interest? We played out two variations on this theme—one in which the on-farm heir used commercial loans to make the purchase, and one in a “family friendly” deal with an installment sale over 20 years and the lowest interest rate allowed by the IRS. In other words, could the farm survive this approach, or was it doomed to the fate of the S Lazy H? Over the course of literally thousands of simulations, the farm survived precisely zero times. Never. Sure, there were years here and there where the farm generated enough income to service the considerable debt demanded by this strategy, but inevitably the variability in farm income would yield enough bad that there was simply no way to make it work. The farm, and Farm Kid, would always be required to exhaust all of the farm’s net income and incur additional debt or nonfarm sources of income to sustain the payments. Now, before you think to yourself, “Yeah, but that was a cow-calf and wheat operation in the southern Great Plains… I’m a (take your pick: corn, soybean, swine, dairy, vegetable) operation and we cash-flow WAY better than one of THOSE operations,” you should know that since the initial research we have run the model with everything from Iowa corn operations to Utah dairies and the results of this strategy are almost always identical: The farm simply does not generate enough net farm income to allow for the purchase of half of its equity back from City Kid without a significant contribution of nonfarm income either from off-farm employment of Farm Kid or their spouse, a generous life insurance policy on the life (or lives) of the parents, or substantial off-farm investments that can be liquidated to make the purchase. Despite all this, over 64 percent of farmers and ranchers choose this strategy that seems doomed to failure, at least if “failure” means the dissolution of the farm asset base. How do we know at least 64 percent of farm operators choose this approach? Because 64 percent of farmers and ranchers don’t have any form of estate plan in place,5 and this is also the exact scenario that would come about through the intestate succession laws that govern estates if the person who died had no will, trust, or other estate tools.6 Further, we know this to be the approach of over 64 percent of farmers and ranchers because many of them affirmatively choose this strategy and implement it in their estate tools. The Conflicting Economic Interests of Farm Kid and City Kid To this point, the discussion of giving a farm to Farm Kid and City Kid in undivided interests has carried an implied assumption: Farm Kid inevitably will be forced to buy out City Kid. Why do we make that assumption? Let’s look at our situation from a different perspective. When Ma and Pa give the farm in undivided interests to Farm Kid and City Kid, they have essentially given each of them a share of stock in a business.7 Assume Farm Kid functions as the CEO of the farm business and makes both the day-to-day and strategic decisions for the business. Let us also consider there

Planning for Retirement

Retirement planning doesn’t have to be as daunting as it sounds. For many farmers, the most challenging part is acknowledging that they may have to participate in activities other than farming. This is not an easy transition, but thousands of farmers will tell you that there is life after farming; there is life during retirement. The first step in this whole process is simply setting a retirement date. Then you can start thinking about what you want to do after you retire. Set a Date! Retirement planning starts by picking a date for retiring from day-to-day farm duties. Don’t get stuck in what I call the “5-year trap.” The 5-year trap is a common syndrome among farmers and non-farmers alike: When I ask a farmer when they will retire, they say, “Oh, in 5 years.” When I ask the same question 5 years later, the answer is still, “In 5 years!” By not setting a firm date, retirement planning may never get done. Sometimes, people hesitate to retire because they want to see certain things happen before they hand the reins over to someone else. Discuss with your family: What do you want to do on the farm before you retire? Do you want to make sure the farm continues to the next generation? Do you want to continue working during retirement? What needs to occur for you to feel comfortable letting go of daily operations? Do you enjoy what you are doing now? How will you slow down and back off from your day-to-day responsibilities? What do you want to do after you retire? One size does not fit all in retirement planning. Studies have shown that your attitude about retirement is the key to how happy you will be. Let’s dispel some common myths! Lifestyle Myths Myth 1: Retirement is when you stop working. (If you enjoy working, there is no reason to stop. Think of it as a second career: volunteering, mentoring, or starting a new farm-based business.) Myth 2: Your retirement will be short. Myth 3: Retirees aren’t interested in self-improvement. Instead of a “ride away into the sunset,” think of retirement as time for activities you never had time for: travel, visiting relatives, or hobbies. Financial Myths Myth 1: You need millions of dollars to retire. Myth 2: Happiness is all about money. Myth 3: You can (or cannot) depend on Social Security Retirement. The best way to determine your needs is to create a budget that reflects your specific income and expenses. There are no financial “rules of thumb” that apply to everyone. Discuss with your family: What do you want to do after you retire? What kind of hobbies do you enjoy? Do you still want to work, even if it is not on the farm? Do you still want to work on the farm but do something different? Where do you want to travel? Do you want to spend more time with your family? Retirement Income and Expense Building A retirement budget is simply retirement income minus retirement expenses. Before looking at income from the farm, let’s concentrate on non-farm sources like Social Security and savings. 1. Social Security Retirement Social Security still has significant value: 21% of married couples and 45% of unmarried individuals rely on these payments for 90% of their retirement income. Four things you need to know: Work Credits: You generally need 40 credits. In 2024, you earn one credit for every $1,730 of earned income (up to 4 per year). Claiming Age: Early claim is age 62 (reduced benefits). Full retirement age is 66 and 10 months (increasing to 67 for those born after 1960). Waiting until age 70 increases monthly benefits. Earnings Limits: If you collect before full retirement age, you are limited in how much you can earn ($22,320 in 2024) before benefits are reduced. The “Catch-Up” Problem: It is hard to significantly increase benefits by paying extra into the system late in life. Figure A: Calculate your estimated Social Security payments Annual Benefits, Age 62: $__________ Annual Benefits, Age 65-67: $__________ Annual Benefits, Age 70+: $__________ 2. Income from Retirement Plans If you have an SEP IRA, SIMPLE IRA, traditional IRA, Roth IRA, 401(k), or pension, calculate your annual withdrawal. Early Distribution Penalty: Withdrawing before age 59.5 usually incurs a penalty. Beneficiaries: Money goes to listed beneficiaries, not necessarily who you name in your will. Minimum Draw (RMD): Once you reach age 72 (or 73 under newer rules), you must withdraw a minimum amount. Figure B: Annual Withdrawal Estimate Annual Withdrawal: $______________ 3. Other Sources of Income Consider rental properties, mineral rights, savings accounts, or part-time work. Figure C: Annual Income from other sources Total: $_________ Total of all non-farm retirement income (A+B+C): $___________ Selling, Leasing, and Transferring Assets Depending upon your goals, you may sell, lease, or transfer assets. Use the charts below to evaluate your feelings on these options. Option Set 1: High Needs for Liquidity or Exit Option Set 2: High Needs for Legacy or Tax Planning In case the last chart didn’t help you decide, let’s flip the questions around and see how you feel about these four questions: Comparing Risks and Rewards The primary decision boils down to risks and rewards. If you draw income from a renter or the next generation, your income depends on their success. Reflection What do you want to do before you retire? Leave time to accomplish the things you want to get done on the farm and time for post-retirement activities! Today’s date: ________________ Retirement date: ______________ Workbook Resources The following worksheets in Cultivating Your Farm’s Future can help you start this conversation: How “Retired” will you be?, p. 33 How “Retired” will you be? Follow-up, p. 43 References This chapter is adapted from the Cornell University publication, Using Farm Assets for Retirement, by Steven Richards and NY FarmNet.

Values, Vision, and Intentions for Farm Succession

All businesses, regardless of size, the product produced, or the service offered, have three components: assets, management, and income.A farm family business consists of family-owned assets that are managed by the family to produce income for the family. If the current generation’s plan is to transition the farm family business to a succeeding generation, the transition must include all three of these pillars. 1. Transitioning Assets Assets can be defined as tangible or intangible. Tangible assets: Land, equipment, facilities, livestock, and tools. Intangible assets: Leases, ownership interests, goodwill, and reputation. While the value of tangible assets is easier to define via fair market value, intangible assets like reputation often lead to business opportunities that wouldn’t be available otherwise. Six Fundamental Questions for Asset Transition To thoroughly evaluate the transition, both generations must answer these six questions: The Owner Generation: What assets are owned by the current generation? How does the current generation own the assets? What is the net fair market value of the assets? The Succeeding Generation: Who in the succeeding generation will own the assets? How will the succeeding generation own the assets? When will the succeeding generation obtain ownership of the assets? 2. Transitioning Management The management component consists of two parts: Structure and Control. Structure Is the farm business a sole proprietorship, a partnership, or a business entity? Business entities are frequently used to manage risk, enhance financial management, and concentrate management efforts. Control Control is often the most sensitive part of the transition. Consider these questions: Who makes the decisions and how are they made? Is it a single individual, or a process of consultation and collaboration? Who makes the short-term vs. the long-term decisions? 3. Transitioning Income How is income distributed to those involved? Common methods include salary, hourly wages, profit sharing, fringe benefits, and expense reimbursement. Key considerations for income usage: Is income used to expand the business? Does it fund retirement for the current generation? Is it set aside for unanticipated expenses? The Lynchpins to Planning: Values, Vision, and Intentions While assets, management, and income are technical and transactional, the “middle step” of succession planning is often overlooked: Where do you want to be? This step requires strong communication and deep reflection. To create a sustainable plan, families must use their values, intentions, and vision as a basis for decision-making. Source Values Values are beliefs shaped by our experiences. When values are identified, decisions become clearer. Value Systems: These link people by creating shared standards for judgment. Priority Shifts: While core values may not change, their priority might. Past decisions may no longer reflect what you value most today. Vision “Vision without action is a daydream. Action without vision is a nightmare.” — Japanese Proverb Developing a shared vision changes succession from a daydream to a concrete idea. Start by answering questions about daily tasks, responsibilities, and income sources for the next 3 to 5 years. If goals and timelines don’t match, more discussion is required before a plan is possible. Source Intentions An intention is a goal or purpose you plan to carry out. For Owners: Intentions may revolve around legacy. Is it more important that the family owns it, or that it simply remains a farm? For Successors: Intentions involve management skills and lifestyle goals, such as vacation time. While seemingly trivial, ignoring these can derail the best transactional planning. Summary There is no one-size-fits-all in succession planning. Completing these activities—Values, Vision, and Intentions—is the key to understanding “where you want to be,” which ultimately informs the final step: “how to get there.” Source Reflection Questions Do you have your vision and intentions around your farm succession written down? Have you shared your vision and intentions with your spouse, business partners, and family members? How do you plan to share your ideas with others? Recommended Resources The following worksheets in the Cultivating Your Farm’s Future workbook can help you start these conversations: Core Values Clarification Exercise, pp. 27–30 Intentions for the Owner Generation, pp. 24–25 Intentions for the Successor Generation, p. 26 What Does Your Future Look Like?, pp. 31–32 Sources https://farms.extension.wisc.edu/articles/values-vision-and-intentions-for-farm-succession/ https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/tangible-and-intangible-assets#:~:text=All%20other%20assets%20are%20recorded,can%20be%20tangible%20or%20intangible. https://dor.wa.gov/taxes-rates/other-taxes/estate-tax/estate-tax-deduction-farms https://farms.extension.wisc.edu/article-topic/farm-succession-estate-planning/#:~:text=To%20create%20a%20sustainable%20succession,for%20decision%2Dmaking%20and%20informing https://farms.extension.wisc.edu/articles/balancing-family-and-business-goals-is-the-key-to-farm-succession-planning/ https://www.dayforce.com/blog/complete-guide-to-succession-planning

Getting Ready to Meet with Farm Succession and Estate Planning Professionals

The Cultivating Your Farm’s Future Workbook for Farm Succession Planning in Wisconsin is an incredible resource to help your family plan for the transition of your farm to the next generation. Each section of the workbook is designed to help you have thoughtful family discussions about the future of the farm and how to best prepare the next generation to take over the complete management of the farm. Additionally, these worksheets can be used to develop resource notebooks that can be used as you meet with professional advisors as well as by your family as they execute your estate upon your death. So, let’s take a closer look at these notebooks. Succession and Estate Notebook The first notebook to develop is a succession and estate notebook. This notebook should include copies of the documents that your attorney and other financial and tax professionals will need to review as they help craft your plan. I would recommend getting a large three-ring binder and purchasing protective sheets that you can put inside the binder to place each document. So, what documents should be placed in this notebook? Essentially, you will need to provide an accounting of all your assets and liabilities. For instance, if you own a 100-acre crop field, your attorney will need to see the deed and how it is titled. Having this documentation will help your professionals to develop a balance sheet for your estate as well as to review how each asset is owned, titled, and who will inherit each. Your attorney will also need to examine which of your assets have (or need to have) transferrable on death (TOD) or payable on death (POD) designations. Key Documents to Include: Family Information – Include a detailed list of your family. Include spouses, children (step, adopted), and grandchildren. Include other names of persons who should be accounted for in your estate plan. Legal paperwork – Include copies of existing legal documents such as power of health care attorney, living will, financial power of attorney, will, trust, and business entity documentation including any operating agreements. Note that some of these documents may not be in place already and will need to be written as you meet with your attorney. Include any divorce or property settlement orders. Include any pre- or post-nuptial agreements that are in place. You can also include end-of-life planning documents (i.e., funeral planning). Tax paperwork – Include copies of any previously filed federal gift tax return forms. Real estate documents – Include copies of the deeds for your home (primary and secondary), rental properties, and farmland. Also include deeds for property owned by a business entity that you have financial stake in. Include copies of any mortgages. Also include copies of any legal easements or leases (land, oil and gas, solar, carbon) that are in place. Financial accounts – Include copies of the recent account statements for your checking and savings accounts. Include business accounts. Investment accounts – Include copies of retirement accounts, pension accounts, mutual funds, stocks, bonds, and other investment accounts. Insurance – Include any insurance policies you have. This includes life insurance policies, car vehicle insurance, farm insurance, disability, long-term care insurance, and home insurance. Credit cards – Include a copy of a recent account statement. Farm asset list – Include a list of equipment, machinery, and livestock. It is recommended to include a copy of the current depreciation schedule for these assets. Also include an inventory of grain and other ag commodities in storage. Personal asset list – Many of our personal assets are not titled. It is a good idea to include a list of personal assets such as computers, antiques, jewelry, books, tools, and special collections that you own. You may want to list who you wish to inherit each. Liabilities – Provide a listing of loans and other outstanding debts. Additional items that can be included in this notebook include the account login and password for each account that you may have. It is also nice to include a list of your advisors and their corresponding contact information. This should include advisors such as attorney, lender, financial advisor, tax preparer, insurance agent, crop consultant, veterinarian, farm financial consultant, and other key advisors. It is also a great idea to include a listing of where important paperwork is located (if not included in your notebook). Selecting Professional Advisors Once you have your notebook compiled, it is time to engage legal and financial professionals to help you craft your succession and estate plans. If you do not have an attorney, financial advisor, or tax specialist, you will need to take time to research professionals. So, what should you look for in professionals? First and foremost, you will want to work with professionals who you can trust, who understand the complexity of farm estates, and who will work to create a plan that fits your family. Unfortunately, there are some professionals who use a cookie cutter or a one size fits all approach. It is important that you interview these professionals to make sure they are a good fit. Remember, you do not have to hire the first lawyer you consult. Section 3 of the Cultivating Your Farm’s Future Workbook includes questions that you should ask as you interview potential service providers. Use the worksheets to evaluate their services and how they match with your needs. Most professionals provide a free initial consultation for you to get to know them and the services they provide better. It is also a great idea to seek recommendations from friends, family members, or neighbors. Ask why they liked the professional and if they were happy with their work. You can also ask other service professionals for recommendations. You can also reach out to your local extension office personnel as your state farm management team may have a list of attorneys and other professionals who specialize in farm estates. Potential Interview Questions: What are your qualifications/credentials/training? Do you work specifically with business succession and estate planning

Long-Term Economic Viability and Farm Succession

Economic viability of the farm business is one of the many challenges facing successful farm succession. A less-than-ideal economic situation may sustain for several years under the current generation whose economic needs and desired lifestyle are largely met. However, that same economic situation may not work for the next generation who is looking to build wealth for their future and their children. At this point, economic viability has increasing importance. This chapter is organized into three parts: Concept, definition, and measurable goals for long-term economic viability Process for evaluating current viability and determining future strategic direction Analytical methods for deeper evaluation of viability components for focusing management decisions and actions In addition, the Appendix provides links to several analysis tools. Part 1: Long-Term Economic Viability – Concept, Definition, and Measurable Goals Economic viability is rooted in the broader ideal of sustainability. While the definition of sustainability continues to evolve, Figure 1 illustrates the broad agreement that sustainability includes some interconnected mix of economic, environmental, and sociological goals (Latruffe et al., 2016). Figure 1: Components of Sustainability Economic viability itself is more narrowly defined as farm-level financial success (Christensen & Limbach, 2019; Smale, Saupe, & Salant, 1986). Spicka et al. (2019) and O’Donoghue et al. (2016) provide summary definitions of farm-level viability from several authors and contrast U.S., Canadian, and European views. Common among the definitions is the capacity of the farm family to have enough financial success to “make a living,” while differences include how financial success I measured, the breadth of what is included in “making a living,” and the scope of measurement (farm, household, regional food system, etc.). Scope is particularly important when considering the viability of the farm household versus the narrower scope of the farm business only. While a farm business itself may not be viable, the farm household may be sustainable due to off-farm income of household members (Hennessy, Shrestha, & Farrell, 2008). The Working Definition However, while the current generation may be viable due to non-farm sources of income, that viability may not transfer to the next generation. Thus, this discussion is confined to the financial viability of the farm business only to support family living and continuation of the farm, particularly in the context of transition to the next generation. Latruffe et al. (2016) add risk and time to the definition of long-term economic viability for farm succession. Their definition includes the need for financial success to make a living, but they add the need to do so continuously in the long term (time) under changing economic conditions (risk) for the “professional life of the farmer, or across generations” (p. 125). Building upon this previous work, following is both a working definition of long-term economic viability and financial goals for measuring viability in the context of transition. Long-term economic viability is the continuous capacity of the farm business to meet financial goals for the present generation under changing economic conditions, without compromising the financial ability of future generations. The Five Financial Goals Financial goals are the long-term ability of farm revenues to cover: Operating costs, interest, and taxes. Return to owner labor equivalent to its opportunity cost. Return to management equivalent to its opportunity cost. Asset recapitalization of the farm business. Return to equity capital equivalent to its opportunity cost Changing economic conditions are the risks that farms face (prices, weather, policy changes, geopolitical events, human resources, the five Ds¹ , etc.). A farm business does not know what the risks will be, when they will occur, or future risks that are yet unknown. Thus, long-term economic viability must include robust resiliency to absorb the economic consequences of any risks that may occur now and in the future. Understanding Opportunity Costs Opportunity cost refers to broader choices an individual has about where they can employ their labor, management, and capital. The earnings forfeited by owners for putting their labor, management, and capital into farming instead of some alternative is real money not in their pocket because of their choice to stay in farming. This forfeited money is an opportunity cost and for the next generation who is already at a point of choice, covering this cost may be a deciding factor for returning to the farm. Opportunity cost of owner labor refers to the manual labor supplied by owners, while opportunity cost of management is the owner’s thinking, planning, organizing, coordinating, decision-making, directing, etc. The value of each depends on the owner’s alternative employment opportunities for their labor and management. In practice, it can be estimated using local, state, or national statistics of labor salaries, 4 to 5 percent of total revenues, or some other method. Whatever method is used, the key is assessing whether the farm is providing a fair return for the owner’s physical and intellectual efforts compared to what they could command off the farm. Again, it may for the successor generation it is likely a major part of their decision-making. Note, opportunity costs of owner labor and management are often estimated together as one sum. However, in this analysis, they are separated to distinguish a full versus partial return for the owner’s efforts. Opportunity cost of owner equity is what the owner’s investment in the farm could return in a non-farm investment of similar risk. A conservative long-term estimate is 5 percent of owner equity. However, ultimately it is what return the owner would receive if they invested elsewhere. Asset recapitalization is how much is needed each year to maintain and modernize the physical infrastructure of the farm (machinery, buildings, etc.). Each farm’s needs are unique depending on the type of business, degree of technology, age of current infrastructure, etc. A typical estimate based on the useful life of common assets is 10 percent of machinery market value plus 5 percent of buildings market value. Part 2: Process for Evaluating Current Viability and Determining Future Strategic Direction Table 1 shows a process for using the accrual income statement to evaluate viability strength or vulnerability through an analysis of

Monthly and Annual Spending Plans

Understanding Farm and Household Expenses Farm household expenses are oftentimes mixed with the farm business. The farm may supply material or goods that might be used by the household. Conversely, the household often provides many items that may be used in the farm business. For example, if the house is part of the farm, the farm’s mortgage payment may have financed both the residence and farm buildings, land, etc. Electric bills and property insurance may not be separated for the house versus farm buildings. Receipts from some businesses can include both farm supplies and household expenses such as cleaning supplies, food, etc. Over 100 years ago many farm households were receiving their major support by consuming their farm products at home, as compared to purchasing from outside sources. W.C. Funk reported in the 1918 Farmers’ Bulletin, “It has been found that, in general, over 60 per cent of the food and over 50 per cent of the fuel consumed by farm families is produced on the farm. This important contribution of the farm is often not fully appreciated by the family enjoying it. A record of the actual products retained on the farm for family use may be of interest and value.” While this large amount of food and fuel may not be consumed by today’s farm household, separating these expenses can be helpful to understand what it might cost to live without including the farm expenses. As the owner generation considers a farm transition, it will also be important to differentiate these expenses. The farm business may or may not be able to pay for more than one family’s household expenses. Determining how much will be needed for household costs would help to estimate the income needed. Creating a Farm Household Spending Plan A farm household spending plan is an estimate of how much is needed for farm household expenses. However, this spending plan can be a difficult task to complete if you are not tracking your expenses. Having separate bank accounts for both farm business expenses and family household expenses can make this separation and tracking of costs easier. When it comes to farm versus household accounts, separate checking, savings, and other accounts can safeguard business funds from personal ones, allow farms to monitor farm spending more easily, and assist with recordkeeping of the farm’s finances. Approaches to Tracking Household Expenses Here are a few approaches to track and estimate your farm’s household expenses. Start by jotting down household expenses for one week. You can continue for one month to get a more accurate picture, or you may choose to estimate your monthly expense based on this week. The first step in tracking might be to log expenses using a notebook or ledger book, word processor document, computer spreadsheet, etc. Other methods to keep track of household expenses include jotting down expenses on a calendar or labeling envelopes with the different expenses and sorting receipts into each. While tracking your expenses may be time-consuming, it will be necessary to complete the Monthly and Annual Spending Plan worksheets. The Monthly and Annual Spending Plan worksheets can be used to attribute expenses to the household and farm business. In a farm succession, these worksheets can be used by both the owner and successor generation. The worksheets are sorted into three sections: “Household Expenses Worksheet,” “Debt Worksheet,” and “Household Net Income Worksheet.” Household Expenses Worksheet The Household Expenses Worksheet will review your monthly costs related to the farm household and assist you in determining what percentage of these costs are being paid by the farm business as compared to family living or nonfarm income sources. The two columns “% Family Living” and “% Farm Cost” will assist you in allocating percentages of an expense that may be combined and currently paid as a total cost. Think about what percentage of an expense is personal and what percentage is farm related. You may not have a split percent for every expense as this may apply for only a few spending categories. Total these expenses on this worksheet to determine your annual living expenses and what may be your annual family living cost. As you complete this worksheet, think about which expenses may go up or down as you transition the farm business to the next generation. Spending Categories Housing: mortgage/rent Mortgage or rental payments are examples of fixed payments. This type of expense is not likely to adjust over the year or multiple years. For many farm families, a farm mortgage may encompass the house and farm buildings, farmland, etc.Who will be making this loan payment? Are you planning to move off the farm and have a separate mortgage or rental expense? Property taxes Farmers must pay real estate and personal property taxes on farm business assets, such as farmland and farm buildings. They may be able to deduct these expenses from earned farm income. However, this deduction should not include property taxes from a house or land with a house on it. To determine the amount of property taxes that are allocable to a house that is on a farm or farmland, you should work with a tax preparer or accountant.Who will pay the property taxes on your home in the future? Are you planning to move off the farm and have property taxes on this new property? Insurance: home/auto Farmers must pay real estate and personal property taxes on farm business assets, such as farmland and farm buildings. They may be able to deduct these expenses from earned farm income. However, this deduction should not include property taxes from a house or land with a house on it. To determine the amount of property taxes that are allocable to a house that is on a farm or farmland, you should work with a tax preparer or accountant.Who will pay the property taxes on your home in the future? Are you planning to move off the farm and have property taxes on this new property? House repairs/maintenance Repairs are a

Building the Bridge of Trust in Farm Succession

Defining Trust There are many definitions of the word “trust.” According to Merriam-Webster’s Dictionary, one definition of “trust” is “assured reliance on the character, ability, strength, or truth of someone or something.” Another way is to look at trust as a vulnerability. You are taking the risk of making something you value vulnerable to another person’s actions. Being vulnerable is not something that is easy to do. By understanding our own definition of “trust,” we can begin understanding how others trust, which in turn will assist in clear communication and conflict navigation. Some questions to ask yourself as you navigate trust would be: “What does it look like in your farm operation when there is trust?” And on the flipside: “What does the farm operation look like when there is lack of trust?” The answers to those questions are the first step in building the bridge of trust on your farm. In this next section we will talk about three common types of trust that can be found in almost any business setting. Types of Trust Let’s look at three different types of trust: interpersonal, competence, and institutional trust. Interpersonal Trust Interpersonal trust is based on the relationship you have with another person, and the length of time you have known them. If someone continues to show they can be relied upon in a predictable way, they are considered trustworthy. An example of this in farm succession could be the relationship between the owner generation and the successor generation. Decisions about the farm operation are shared openly between the owner and successors. Both the owner and the successors care for each other, and they want what’s best for each other. It’s when either generation, in small ways, is not doing what they say they are going to do that trust can begin to break down. Competence Trust Competence trust is based on skills, abilities, and experience the other person has. If the other person has the expertise to aid in solving a problem, then we are more likely to trust their judgment or advice. From a succession standpoint, it could be that the owner generation begins to hand over management decisions to the successor generation so they can incorporate the experiences and expertise they acquired, whether that be through a degree in an agriculture-related field or working with another farming operation. If the owner generation encourages the successor generation to go off farm to get a degree and/or work off farm, they trust that the successor generation will eventually come back and apply the skills and knowledge they gained to the farm operation. Institutional Trust Institutional trust is based on whether we see the “system,” the rules, or the processes as being trustworthy. We see this in farm succession planning as well. If the owner generation is open and clear about farm financials and the current state of the operation with their successor generation, this creates a culture of trust that the owner generation isn’t hiding problems or concerns they have with the state of the business. This opens up a clear line of communication between one generation and the next. Another example would be that the successor generation will trust that there is a plan in place for distribution of assets, and that it will be clearly communicated among all the heirs (both on and off farm). Breakdowns of Trust Now that we have covered types of trust, let’s explore what might impact trust in the farm operation. A lot of farm operations are family owned. For some family-owned farms, it might be hard to keep problems that arise in the family from impacting the farming operation. No one size fits all and each farm operation is different; however, there are some acts or instances that could impact trust in all farm businesses. Acts of Commission The first way trust can be broken would be an act of commission. This is when a person, group, or organization does or says something that is inconsistent with what you expect. For example, an owner generation who is normally open about decisions on the farm decides to sell without even consulting the successor generation about taking over the farm someday. Acts of Ommission The other universal way trust can be broken is through an act of omission. This is when a person, group, or organization fails to do what they say they are going to do. An example of this would be the successor generation planning to go to school or work on another farm operation in the hopes of one day taking over their own farm, but then not following through on their skill building and becoming unable to run the farm operation. Maybe either generation struggles with addiction, and it gets in the way of their financial ability to manage the farm. These breakdowns of trust may seem hard to overcome. In the next section we will talk about ways to overcome those challenges by using “posts” to build your bridge of trust on your farm. Building the Bridge Bridges help us to get from one point to another. In order to help you visualize building a metaphorical bridge, it may be helpful to have a pen and paper handy. On that sheet of paper, you are going to draw two points—you can use half circles for hills or whatever symbol would make the most sense to you. You are going to leave space between the two hills. This space will represent the barriers to building trust. On one side you are going to write down what trust looks like currently, and on the other side you will write down the end goal you want to achieve. Having a clear idea of what that goal looks like will help you know when you have reached that side of the bridge. Writing the goal down will help with that visualization. For a farm business, this will look different for each person involved with the operation. Maybe the end goal is

Family Versus Non-Family Transfer of the Farm

Introduction People often think the transfer of a farm is much different if it’s going to family than if it’s going to non-family. However, when you look at the process, they are vastly similar with just a few differences that make a large impact. Methods of Transfer The method of transfer used makes the most difference. The options include a planned, gradual succession or an outright sale of the property. In the succession process, the owner generation focuses on their desires for the farm. The process may take more work to accomplish than an outright sale and is more complex than leaving the farm to heirs in a will. The owner generation determines their intentions, values, and vision for the farm and for themselves so they can develop a plan. The owner generation may accomplish this on their own or with the assistance of ag professionals. There may already be an identified family successor, or the process may bring to light a family successor for the farm. If through the process the owner generation concludes that there is no family successor for the farm, then they may choose to search for a successor among their employees or others involved in the farm. Or they may look beyond the farm to neighbors or other young farmers. The second option is to put the farm on the market so a potential successor may identify themselves by expressing interest in or bidding on the farm. Whether sold through a realtor, auction, or directly from the owner generation, the determining factor in who will get the farm is who can afford to pay for it. Successor Constraints Potential successors, whether family or not, face many of the same constraints. 1. Lack of Capital The number one stumbling block for a successor is the capital required to purchase a farm. The United Kingdom’s pilot Farm Start and the County Farms Estate initiatives found this to be true. Keeping It in the Family also reported capital requirements as a barrier preventing younger people from entering production agriculture. In the University of Wisconsin’s 2021 focus-group-based research, farmers shared that financial barriers were the second-largest financial concern they had in relation to succession planning. Beginning farmers or successors have a difficult time obtaining a loan due to high land prices. Lack of capital results in lack of land. Family successors may be offered a discounted farm value to pay or a partial gifting option. The owner generation usually seeks full market price for the farm or assets if sold to non-family successors because family members are more likely to have sweat equity invested in the farm. And the owners may have been given a discounted option when they took over the farm and want to pay that forward to the next family generation. The owners also often depend on the sale of the farm for retirement income because they don’t have a retirement fund. All their money went to maintaining the farm business. Often successors do not have the financial resources, nor can they acquire credit, to purchase such a farm. Therefore, younger-generation farmers should focus on getting their financial affairs in order so that they have a down payment and qualify for loans they need to purchase land. 2. Housing On-farm or reasonably priced local housing is challenging to find in rural areas. Increased demand, in part due to remote work capabilities, has increased rural home values and limited the options. Owner generations often want to remain in the area they know best. They usually have deep ties to the farm, especially if it has been in the family for generations. They may have negotiated an option to remain on the farm for an extended period of time, especially if maintaining a role in the farm. Successors desire to be on the farm or close by. If a second home is not available on the property, it creates an additional financial burden for the successor. 3. Experience Potential successors are expected to have a measurable amount of farming experience to be considered. The 2021 Wisconsin study reported generational divides, which included the owner generation’s feelings about the successor generation not being ready or able to take over the farm. The research study demonstrated that, whether family or not, the successor’s ability and management skills (or perceived lack thereof) played a role in the owner generation’s willingness to transition the farm. It is important for younger farmers to obtain farming experience so that they are qualified for land opportunities that arise. It may be wise to ask in a job interview if the owner has a succession plan or if they are looking for a successor. It may get the owner generation to think about succession options if they haven’t already done so. Seasoned farmers are difficult to impress, and a high level of skill is required for a potential successor to be deemed ready to take over a farm. A successor’s level of experience and work ethic will lend itself to increasing credibility in the farming community. 4. History of the Farm The farm’s history is very important to the owner and hard for an outside successor to understand. Farm owners often have put their heart and soul into the farm and the farm is their life. They appreciate a successor who has a deep enough interest that they want to learn the stories of the farm. The owner generation wants the stories to remain a part of the farm history. If the owner is seeking a successor, the entire process will likely require more time and a commitment on the part of both parties as they get to know each other and gain confidence in each other. The owner generation can then determine whether they feel they trust the non-farm successor with their farm. When an owner generation has put their heart and soul into a farm, finding the right person to take it over is a huge decision and one they don’t take lightly.

Tensions of Farm Succession

Farm succession is more than the technical details of legally transferring the ownership of assets and tax management. Farm succession can be messy because it involves people rather than just assets, and people have different emotions, different values, and different goals. These emotions, values, and goals can cause tensions among farm and family members. Powering through the technical process of succession without acknowledging and addressing the tensions in your situation will give you a plan, but how long will it last when the tensions build to a breaking point? It is normal to have tensions around farm succession. As noted, it can be emotional, and for many, change is something to be avoided. Normalizing the fact that there will be tensions and taking the time to consider your farm’s tensions can set the farm on the path to a more resilient succession plan. It’s better to have awkward and necessary conversations now rather than later. The Five Areas of Farm Tensions In 2009, researchers in Pennsylvania interviewed farm family members who were in various stages of succession planning. From these interviews, they concluded that there were five tensions present in these conversations. Similar tensions were found from focus group research conducted in 2017 in Wisconsin. While your farm may have unique tensions, there are five common areas/topics where tensions arise around farm succession: Finances Communication Inheritance Change Control Finances In the Pennsylvania study, this was referred to as “profit versus affordability.” In Wisconsin it was described as the competing financial needs between the generations. Both research studies noted that increasing land values coupled with tighter profit margins make this one of the more common tensions. When farms are managed by one person, couple, or generation, financial recordkeeping and analysis may focus on tax document preparation and numbers to support loan requests. However, when bringing another person, family, or generation into consideration, more comprehensive financial analysis provides a place for necessary conversations around the past performance of the business and the capacity of the farm to support more people. If analysis of the past 3 to 5 years indicates the farm has adequate capacity and performance, the questions around this area of tension tend to fall into these two potentially conflicting categories: What does the owner generation need/want for the assets? What can the successor generation and the farm afford to pay for the assets? Communication In both the Pennsylvania and Wisconsin studies, farmers recognized the need for clear conversations around succession planning. Unfortunately, many farms rely instead on assumptions. In Wisconsin, the word used most to describe tension about communication was “transparency,” especially around income/finances, roles/responsibilities, and decision-making.If the succession is between parent and child, both generations must work to break any unhelpful communication patterns. The other tension under the communication category was “starting the conversation.” A surprising number of farm families do not have intentional conversations when a family member returns to the farm to work. At a minimum, farm members should discuss the job description, the compensation, and the possible pathways to eventual management and ownership for the incoming generation. These conversations happen more often when the incoming person is not related! Inheritance This tension concerns the following question: Should the distribution of assets at the owner generation’s deaths be equal or fair among the heirs? This is one of the most common questions farms must answer. Inheritance can symbolize love, trust, and competence. If most of the owner generation’s net worth is in farm assets that are needed for the farm to continue, equal distribution can put the future of the business at risk if the non-farming heirs want the value of the assets immediately. Recent research from Oklahoma State University (OSU) used a representative farm model to analyze options to transfer ownership to an on-farm heir while considering inheritance distribution with an off-farm heir. The OSU research indicates that unequal distributions improve the likelihood of transferring the business and of the business reaching basic success milestones over a 20-year period. Equal distribution of farm assets stems from the desire to treat all children fairly, not considering that the children’s contributions to the business can vary after they become adults. This is an example of family goals and values influencing business decisions to the detriment of the long-term viability of the farm. And this fairness value can be in direct conflict with another common farm family value: legacy. Change The Pennsylvania researchers described this as “progress versus continuity.” The owner generation sees no reason to make changes to the operation (continuity), and the successor generation wants to put their education, experience, and management skills to work in the hopes of making a positive mark on the business (progress). The challenge in this tension is that the owner generation may take the suggested changes from the successor generation as judgment. The owner generation hears: “You’ve been doing it wrong all these years.” While in some cases that is exactly what the successor generation means, many more times it is not the intention. The successor generation is eager to show their value and see the business move forward. If the owner generation has gotten the farm to a place where a succession plan can be considered, they’ve made some right decisions along the way. The successor generation would be wise to consider this and acknowledge this fact. On the other hand, the decisions the owner generation made were made in the past, and now the successor generation may have a completely different “set of facts,” such as the economy, markets, and environmental regulations. The farm and family members may want to define continuity less in the way things get done, but more broadly in the facts that the farm continues to be a farm, or the land continues to be in family ownership, if those are important goals they’ve identified. And progress may be the path to reaching those goals. Control This was described as “retaining versus letting go of control” in the Pennsylvania study. Insisting on keeping