There’s a perfectly good reason why so many farmers are reluctant to hand the reins to the younger generation.
“With land, you need it for the farm and you need it to run the business, but it’s also your largest contributor to the family wealth,” said Greg Gartner, a partner at Moodys Gartner Tax Law LLP.
“How do you deal with that in terms of providing for the landowner now and talking about succession down to the next generation?”
Land is only a farm’s main asset, but generates a relatively low cash flow, Gartner told FarmTech attendees.
“When we pass this down to the next generation, it pretty much can’t support more than one family,” he said. “We’re not going to be paying somebody out for their retirement and trying to keep the farm going.”
As a result, the older generation is understandably afraid of transitioning the land to the younger generation.
For the most part, the older generation is scared of the three Ds — death of the child (“How do I get the land back?”), divorce (or the “dreaded daughter-in-law”), and debt if the child mortgages the land.
A good succession plan should deal with four key criteria, said Gartner.
The first thing producers will want to do is keep the land in the family for a period of time.
“You want to be able to prevent a sale down the road by the kids. You don’t want the quick flip.”
Second, there should be consideration for “a change in parental circumstances.”
“This is Mom and Dad saying, ‘I don’t know how long I’m going to live. I may need access to that capital to keep me in the lifestyle to which I’ve become accustomed.’ That’s a perfectly valid reason for hanging on to it.”
Producers will also want to protect the land from matrimonial property claims in the event of a divorce. “You may love her like a daughter, but she’ll take half the land.”
And finally, the son or daughter who takes over the farm business needs to have access to the land.
“If I take a look at the business of farming, what do I need? Do I need land — or do I need access to land?” said Gartner.
“I know a lot of really big operators who operate with a very small land base. Everything else is rented. If I want to make the business run, what I need is the access, not the land itself.”
But the real “gorilla in the room” is how to provide access for the child who farms while keeping peace in the family.
“I don’t know how many times I’ve heard it across the table when I’m talking to operators who say, ‘I want to be fair to all my children, but I know the operation won’t make it unless my operating child has the entire land base,’” said Gartner.
“But there’s a big tool box available to meet whatever the family’s circumstances are.”
The first option — “and a real simple one” — is a direct transfer of the land.
“But the big con here is that you’ve got rid of it — you no longer own the land, so you’ve lost control of it,” he said. “And there’s no ability for the operating child to use all of the land without consent of the other (siblings).”
The older generation can also provide access to the land through a lease.
“To me, this is one of the big tools that people don’t appreciate how flexible and useful they can be in transferring the land between non-farming and operating children,” said Gartner.
“The upside is it gives control. You still have ownership of that land, but you’re giving its use to somebody else.”
And by registering a caveat against the land before it’s transferred, the son or daughter who is farming can retain access to the land.
“Dad can then transfer it to the kids, but it’s going to be subject to the lease,” he said. “I’ve been able to create a mechanism that gives the operating child access to the land during some sort of transition period. He doesn’t have to own it, but he has access to it in terms of his business operations.”
But one of the best ways to create a win-win for everyone involved in a land transfer is by developing a partnership.
“They serve a really useful purpose in transferring land down to the next generation, especially if you have operating and non-operating children,” said Gartner.
“The thing I like about partnerships is that a parent can retain control. It’s just a contract, and I can write anything in that I want.”
A partnership agreement can provide access to the land, stipulate that the land must be kept within the family, protect against matrimonial claims, and ensure an income for the older generation — all four of the key criteria producers need to think about when transferring land.
“I like using these partnerships to transfer to the non-farming children. The parents can keep control during their lifetime, and then we can have the partnership agreement almost act like a will.”
But ultimately, every operation is different, and producers need to think long and hard about how to make a land transition work for them, said Gartner.
“There’s no golden bullet. There’s no simple answer.”