Reviewing Your Succession Plan

Written by: Russ Tweiten, SVP Succession and Retirement Planning

Do you remember the last time you stopped to consider your succession plan? For many farmers and ranchers, it can feel like a tedious task that is not necessarily top of mind. With rising costs and valuations, revisiting your plan and making necessary updates will keep it current. Let’s look at some of the common elements and considerations of a succession and retirement plan.

Farming and ranching often involve multiple people. Business agreements between parties come in different forms, and we tend to see buy-sell or stock-purchase agreements. With today’s elevated price environment, now is a good time to review such agreements. Questions to lead your review could include:

- Are buyouts still viable given today’s values?

- Do buyouts work with expansion plans for new land, machinery, or bin/site improvements?

- What happens if there is an untimely death, disability, divorce, or departure/retirement?

- Are there buyouts for non-farming parties, and can your operation cash flow for your successor?

It is important to keep in mind what you have agreed upon. Remember, make sure everything is in writing. This will help ensure your wishes get carried out and the farm or ranch stays together.

Regardless of whether talking about a buyout between business partners or terms and conditions for the estate plan, with high prices for most agriculture assets today, look at the following documents to see if the buyouts you have are still viable:

- Wills and revocable trusts (the estate plan)

- Buy-sell agreements for partnerships, LLCs, and corporations

- Operating agreements where assets are coowned between related and non-related parties

- Options and rights of refusal for land and other farm assets between siblings or business partners

- Legal arrangements you have entered into that offer others a right to buy or rent something

Farmers and ranchers often have a significant amount of their assets tied up in their operations. This is true for many customers. Wills or trusts should be designed around whether there is a successor or not. If no successor exists, it can be as simple as each child receiving an equal share of the estate, or the parents deciding who gets which assets. When a successor does exist, we need to discuss the parent’s will or trust successfully transferring their business. For example, any buyouts that a successor may need to execute, whether mandated or optional, with a non-farming sibling, must cash flow.

Most of the parents we work with who have successors state they want to ensure their successors have a good chance to succeed. However, success does not mean everything is free from parents or just handed over. There are times, though, when we may need to do this to successfully transition the operation.

Everything starts with the will or trust. From there, we have the fair vs. equal talk and discuss what, if any, buyouts will be included in the will or trust where a successor buys out non-farming siblings. Again, the goal is to keep the operation together. Paying out today’s high land and machinery values in the form of a buyout can be a major roadblock. An agreement that looked good five to ten years ago may not work today.

To see where you stand, start by running your balance sheet through your will or trust. Does a buyout cash flow? Be sure to use current market value numbers for all assets. Having a balance sheet with low land values is fine while actively farming for credit and lending purposes; however, when you die, we need to use current market values to see how the will or trust performs.

Wills and trusts are not static documents. Estate planning is not a “one-and-done” process. These documents need to be looked at every three to five years with a successor or five to seven with no successor. Keep in mind document performance is based on the value of your estate. You should review your will or trust when:

- Tax and estate planning laws change

- You receive an inheritance

- There is a change in farming status by either you or a successor

- There is a death of a spouse and/or marital status change

- Circumstances with children change

- You move to another state

Conversations between farm and ranch business owners and their spouses or children can be difficult when an agreement is not entered into about how to price a buyout if someone dies, becomes disabled, wants to split up or retire, or if any owner divorces. It is best to have something in place before any of these events occur. If your situation is anything other than a married couple farming together and you farm or ranch with someone in a formal business entity or coown assets, think about a formal written agreement to determine what happens to the ownership interest in the entity or the co-owned assets.

As with a will or trust, run the entity’s balance sheet through the buy-sell or operating agreement and see if the buyout still works. Again, be sure to use current market value numbers in all circumstances. Look at any agreement you have every three to five years to see if the buyouts in place still cash flow. Like wills and trusts, look at your business entity documents now to avoid trying to work out the details if something happens later.

Perfection does not exist with a business, estate, or succession plan. There are good plans that result in good outcomes. Consistent reviews help keep the plan viable. We hope you take some time to see how the documents you have for your estate plan or your business entity (or both) unfold. Talk to trusted professionals who work in this area. Don’t be afraid to ask hard questions about where your plan is going. Know how the documents you have spent good money on will work by using current numbers. This will help you understand how things will unfold if an unforeseen event happens or if that time comes to move on and exit farming or ranching.