Farm Land Transfer Planning: Soft and Hard Issues
The Future of Family Farms: Practical Farmers’ Legacy Letter Project(University of Iowa Press, 2016) edited by Teresa Opheim shares stories, experiences, and advice from farmers in Iowa. Their successes and failures are highlighted to help the future generations of farmers towards successes and survival in a tough industry that is constantly evolving.
Farm Transfer Planning: The Soft Issues Are the Hard Issues
Legacy: something handed down or received from an ancestor or predecessor. A legacy can be money or property; it can be values such as tolerance or stewardship. For farmers, a meaningful legacy typically is a rich mix of “things” and values — land, a home, equipment, relationships, farming practices, and beliefs about hard work, conservation, or innovation, for example.
Farm succession or transfer planning is as much about values, beliefs, and relationships as it is about taxes, wills, and business entities. With the average age of U.S. farmers at fifty-eight, and five times as many farmers over sixty-five as under thirty-five years old, much more attention needs to be paid to farm entry and exit. Beginning farmers report that access to land is among their top challenges, while in one Iowa study of retiring farmers, two-thirds had no identified successor.
A prosperous and resilient food and farming system for our nation requires that a new generation of farmers — whether or not they come from farm backgrounds — be able to start and successfully grow farms and ranches. And if older farmers can’t easily exit from farming, their land can’t become available to entering farmers. And seniors’ holdings are significant.
About 10 percent of all farmland is expected to change hands within the next five years alone, according to the U.S. Department of Agriculture (USDA). Of the 2.1 million principal farm operators — defined as the person responsible for the day-to- day operation of the farm or ranch — farmers over the age of sixty-five account for 33 percent, and they manage about one-third of all land in farms. They own nearly 625.5 million acres of land in farms, of which about 70 million acres are rented to others.
There are another 283.4 million acres rented for agriculture by landlords who are not farmers. Together, over 2.1 million landlords rent farmland. Their average age is 66.5 — older than the average farmer! This sector is comprised of retired farmers, farm widows and heirs, and other owners of agricultural property.
How these lands will be transferred should be of utmost concern — not only to the families directly impacted but also to the communities that benefit from those farms and ranches, and to our society as a whole. The security of our food and farming system largely depends on the ability of farm and ranch operations to keep their farms viable, available, and affordable for the next generation, whether or not from the same family. Older farmers seek a meaningful legacy and deserve a comfortable retirement. “[Retiring farmers’] succession decisions and retirement plans are of considerable importance to the farming community and the future structure of agriculture. Continuity of the family farm and the family farm sector is highly dependent on successful transfer.”
Given the importance of farm transfer, it is crucial to help farmers address the issues and adequately plan. Contemporary conditions compel more attention to farm transfer planning and more support for farmers who seek a secure exit from active farming and a meaningful legacy.
Why? Because traditional methods of farm transfer are no longer sufficient to address today’s agriculture. As mentioned, fewer farmers are starting out on family land. The cost of acquisition through purchase has skyrocketed in many parts of the country, making landownership a distant dream. In parallel, the cost of retirement often means selling farm assets for more than an entering farmer could afford, or dismantling the farm. Gradual transfers, more secure leases, mentorships, conservation easements, creative limited development, and innovative financing, for example, are methods to make transfers more viable for both entering and exiting farmers.
Notably, there is no overarching public policy on land access, tenure, and transfer. A 2010 research report states that “U.S. agriculture faces significant challenges regarding how farms and ranches are acquired, held, transferred and managed for conservation.” It recommends that “public policies should encourage and support the timely transfer of farm businesses and properties in ways that assure a comfortable transition and meaningful legacy for the retiring farmer and affordable opportunity for the next generation.”
The USDA is paying attention. In early 2015, its Advisory Committee on Beginning Farmers and Ranchers was charged by USDA secretary Tom Vilsack to establish a subcommittee on land tenure. The subcommittee was charged with providing recommendations to the secretary on land tenure, access to land, and farm business transitions. A report was submitted with a substantial list of recommended policies, from changes in Farm Bill programs to changes in the Internal Revenue Code — all aimed at improving the conditions for agricultural land access and farm operation transfer. The likelihood of these policies being adopted as laws or regulations is unclear.
Key Terms and Issues in Farmland Transfer
Succession is the process of passing a business from one generation or owner to another. Sometimes succession implies a transfer within a family, but that isn’t necessarily the case. For some, succession is seen as a set of social decisions, whereas transfer focuses more on the legal and economic aspects. The terms succession, transfer, and transition are often used synonymously.
Succession planning is just that — a plan for how a business will continue after the senior/leader exits. The plan determines who next will take leadership and/or ownership and how that transition happens. Succession issues are not unique to farm businesses, but agriculture poses unique challenges.
In agriculture, transfers can be more complex than in other business sectors. This is in part because a transfer typically considers both the land and the business. The land is often the most significant asset, and the business operator typically lives there. Many family-owned businesses have meaningful histories and assets, but farms hold unique places in the hearts of their owners, sometimes for generations. Farm businesses may transfer to a nonfamily successor, but the land may stay in the family. Conversely, the transfer of land does not equate to the transfer of a farm business. The land has unique standing, not just because of its monetary value but also because of its nonmonetary legacy.
Succession planning consists of the transfer of income, assets, and management. It involves estate planning, retirement planning, land-use planning, and business planning. Often, management is the most challenging and least attended to aspect of the transfer. How can the older generation be supported to engage in timely succession planning and exit?
What is retirement? The issue of aging farmers was first raised nearly fifty years ago. However, the predicted mass retirements never happened. Instead, older farmers continue to farm at ever-increasing ages, and are quitting at slower rates. This has enormous implications for farm transfers. If the senior farmer does not exit or transfer control in a timely and thoughtfully managed way, the next in line — if there is one — is much less prepared to take over, and often is discouraged from even trying.
Retirement means different things to different people. In the nonfarming sector, many people “retire” the day they leave their job, period. In agriculture, older farmers stay in farming for various reasons such as greater longevity and better health. Mechanization results in less physically strenuous labor; if the farmer can still climb on the tractor, he can still farm. And while farmers may complain, most experience a strong attachment to and continuing satisfaction with at least some aspects of farming. This is part of their legacy! One farmer may say he’s retired, but continues to run the combine or help with harvesting hay or pumpkins. Others may claim to be partly retired but still control the checkbook. One-quarter of surveyed Iowa farmers said they never intend to retire; this is probably similar in other states. So what does that mean for the transfer and future of the operation?
If retirement is defined as providing no managerial control or labor to the farm, it’s not hard to see why there are shades of gray. In fact, retirement is a process that can take years, and unfolds according to the unique needs and preferences of the farmer and significant others.
What are the issues? Because of the many challenges involved in succession, it’s not surprising that so few farmers have adequately prepared to exit from farming. Only one-fifth of family farms survive the transfer to the next generation. “This could be attributable to the failure to develop a succession plan.” According to one study, only 36 percent of farmers and farmland owners have an estate plan. Eighty-two percent did not have an exit strategy, and 88 percent indicated they do not have financial plans for their retirement.
The challenges are both technical and nontechnical. In fact, farm succession planning advisers quip that “the soft issues are the hard issues.” The lines between the farm business and family often are blurred. Business and family goals can be hard to separate. Family communications can be fraught. Farm families — like other families — tend to avoid difficult issues and conflict. Most of us are reluctant to deal with issues like taxes, diminishment, death, and tensions with in-laws, for example. Nearly half of farmers surveyed in 2006 said they had not discussed retirement with anyone. Relinquishing control, being “fair,” health concerns, and changes in lifestyle, for example, can be challenging to address in family settings. The odds of success can be improved with the assistance of “outsiders” such as a family friend, trusted adviser, or professional coach.
The foundation of successful succession planning is built with a shared vision, clear goals, and open communications. Resolving financial, tax, and legal matters and management transfer are the substance. Is the operation healthy enough to transfer? Can the business accommodate two families? What changes are needed? What are the retirement income needs of the exiting farmer or farm couple, and can those needs be accommodated while enabling an affordable transition to the next farmer? How and when will decision making and control shift?
Historically, inheritance has been the most common way to acquire a farm in the United States. However, since the 1990s this traditional model of farm transfer — from older to younger generation within a family — accounts for less than half of farm acquisition. Therefore, new methods must evolve to facilitate successful transfers, especially between unrelated parties.
In fact, farmers without identified successors have particular challenges in realizing their desired legacy. In focus groups of this sector conducted in 2015, farmers universally said they want to see their land stay in farming. They are open and willing to pass their operation to a nonfamily member, but they need support to develop a realistic plan and to recruit a successor. With the recent surge in interest in farming, more young and not-so- young people are entering farming. Most of them do not come from farms, and many have experience and resources. Nonetheless, their land access challenges are formidable. Improving the ways to connect those seeking farms with those seeking successors will be a significant contribution to future food and farm security.
What services are available to help? Some groups and institutions have well-established programs to assist and educate farm families about succession planning. More are emerging. These include so-called farm link services, succession technical assistance, and land access programs. Yet nationally, there is not yet a sufficient network of informed advisers to help farm families navigate the complexities of transition planning. We need more technical experts such as attorneys and farm financial planners, along with coaches and facilitators, retirement and health care specialists, and land planners and conservation professionals with expertise in agriculture. Farm transfer planning takes a team. And there are costs involved, costs that vary widely. Research conducted in 2011 showed that older farmers see the value of succession planning and do not consider the cost of such as an impediment.
Yet it’s hard to get senior farmers to engage in timely planning. The farmers in this study said that assuring the future of their land was at least as important as the future of the farmer himself. Farmers deserve a secure exit from farming, and new farmers deserve the opportunity to start and grow businesses. That’s what a farm legacy is all about. The stories in this book attest to the importance of farmland owners’ views of their legacy and to the possibility of realizing their vision.
Excerpted from Chapter 2: Farmland Transfer and Why It’s Important, published in The Future of Family Farms: Practical Farmers’ Legacy Letter Project, edited by Teresa Opheim © 2016 University of Iowa Press.
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