Recently Farm Credit Business Consultant, John Black, shared valuable insights regarding farm succession planning from a financial perspective.
Family Business and the Emotional Impact on the Family
John pointed out that transition planning is an important topic for farmers because a family business can have such an emotional impact on the family structure. It’s hard to separate business and family in any kind of family business, and especially hard on a family farm because of the long hours put in to it. It means that the farm is the family’s way of life. It’s also a lot harder because of the huge capital investment.
Things can get very emotional and that’s where an ag professional comes in. John’s seen a variety of different scenarios, a lot of different things that can happen, but an financial specialist can come in as somebody that’s not emotional and strictly look at the numbers and at the situation in a non-emotional manner.
Biggest Stumbling Blocks for Farm Families
Number one is looking at the financial position. It doesn’t seem to matter what kind of project the farm is working on, whether it’s a feasibility study or a succession plan or a transition plan, it revolves around finances, and frankly what the farm can afford to do. The financial position of the business will largely determine what route the transition plan takes.
There’s three ways to transition assets, by selling, gifting, and inheriting. It usually takes a combination of the three. So, if a business still has debt questions must be asked. How does that impact the ability to transfer? Can the business generate the cash flow to afford a buyout and still provide for all the members? Along with that, it’s important to have good financial records so professionals can help determine what the needs are and what the financial position of the farm.
Secondly, communication is a key stumbling block, communication or lack of it, sometimes. In a family, many times it’s easier not to talk about transition, so the transition never gets done. As you know, farmers are farmers because they like working with animals. They like working on a tractor. They aren’t in it for the people skills. So, a lot of times they’re not very good communicators with one another.
The third thing is the ability to negotiate between partners. Where we’re talking about a family business, a lot of times you cannot look only at your own interests. There has to be some kind of negotiation involved. These are some of the major stumbling blocks I see.
Key Considerations for the Senior Generation
When asked about considerations for the senior generation John responded with these insights.
- Most importantly, start early. I think that finances are a key to this. And so, we have evaluation of the farm business assets, as I talked about before. What can the business afford to do and still provide an income for the remaining people in the operation.
- Review of their Social Security check statement. We all hear the bad things about Social Security, and we can’t rely on that to provide for our retirements. But in reality, the Social Security benefits are the basis and cornerstone of our retirements. So, if you haven’t looked at it in a long time, a good place to start is to take a look at that. “Do we have time to build Social Security if we don’t have enough income for in the future. Are we still young enough to be able to bump up our income a little bit through the next few years as we get closer to retirement?
- Another big decision is, when is the best take time to take Social Security. If we take it before our full retirement age, we’re going to have reduced benefits. You can start taking Social Security at age 62, but that benefit is going to be 30% less than what it is at full retirement. And then, there are also income limitations involved with that. On the other side of it, if you wait until you’re 70, from the time you reach retirement age until 70, your benefits will up about 8% a year. And so, somebody that has a full retirement at age 67, if they waited until they were 70 to start taking that, they could be seeing a 25% boost in their Social Security income.
- Look at other non-farm assets. Do they have any IRAs? Do they have pensions from an outside job? Because my main goal is to make sure the senior generation is comfortable and have what they need to provide for their needs in retirement. Also, look at life insurance. Do they have life insurance as a possible payout for some of the family members?
- We always want to look at is treatment of farm and non-farm heirs in this thing. And I adhere to the rule that equal isn’t fair and fair and is not equal. But I think most parents, as a parent of grown children, I certainly want to leave non-farm heirs with something, too. And it’s important that we provide for all of them.
We appreciate John taking time out to share his professional perspective on financial side of farm succession planning.