The handshake agreements and unspoken decisions that ruled farmland and farm business transfer for decades no longer support today’s dairies that may involve multiple generations, farming and non-farming heirs, spouses, and complex, diverse operations. An organized approach to transition is critical to keep the business viable while providing fair inheritances.
A good way to start the process of transition in an organized manner is to utilize business structures, advised agricultural attorney Trent Hilding in a Michigan State Dairy Extension podcast. Having these in place make the gifting and sale procedures easier and allows you to use buy sell agreements, he said.
Hilding recommended establishing one entity, such as an LLC or other corporation, for the operation, and another to hold an owner’s real estate. This is because a business with a significant amount of land won’t be able to afford to give it all away, and an incoming generation won’t be able to afford to buy it all at once. Dividing the assets into separate entities gives everyone more flexibility.
“The real estate is a key investment you want to be separate from your liability, your employees, and the risk factors you have in your operation,” Hilding continued. Though he recognized this won’t be a strategy for everyone, there are many benefits for most farms.
The lawyer also explained that business entities help transfer assets today, while a trust can be used if you want to hold a transfer until death. In this way, assets such as land will avoid going through probate, which occurs when an individual dies with no will or trust and the state must determine how their assets will be disbursed. This process is most disruptive if you have minor-aged children, he said, because they will not have access to your assets until they turn 18.
A will or trust are the primary base documents you need if you want to do any type of transition planning, estate planning, or medical directive, Hilding said. No matter your age or amount of assets, having who you want in charge in writing makes a big difference, he advised.
Equal versus fair
When making a will or working on a transition plan, decisions often come down to creating an equal or fair distribution of assets to the next generation. Hilding emphasized that those two words do not mean the same thing, and because of the scale of farm operations, equal is often not an option.
“In a lot of cases, for the farms to be viable and successful, they do have to transfer in a fashion that’s not equal,” he said. However, “It still could be considered equitable and fair.”
Determining what “fair” looks like for your family depends on communication. Be sure everyone, including spouses, are clear about what ownership means as you work on your plan, Hilding said. Investing in a variety of assets before transition is necessary — such as land or assets not tied to the farm — also gives you more options for non-farm heirs.
For any farming heirs, transition of management duties must occur alongside asset and ownership transition to keep the business functional. This means starting conversations early so there is time for the younger generation to learn, especially on the financial side of the business. Hilding advised senior farm owners to allow their heirs to see the whole picture of the farm — involve them in regular financial meetings as well as discussions with your lender. The biggest misstep he sees in his work with farm transitions is the older generation withholding too much information, often because of a fear of lack of control.
That doesn’t have to be the case, though. Many transition options still give parents the control they need, Hilding said. “Just because we do something on paper doesn’t mean you’re not showing up and aren’t part of the farm. It’s a process on paper to start moving that,” he described.
