Effective Farm Succession Planning

Effective Farm Succession Planning
By: Danelle E. Harrington

Family Farms are unique businesses. Farm children grow up working on the farm and many ultimately become next-generation owners of the business. But, while farms are family owned and oriented, they are also sophisticated, complex, capital intensive businesses. An essential part of the farm business success involves Succession Planning to transition the farm assets and management down to the next generation.

The first step of developing a succession plan for the farm should start with Estate Planning for
every significant participant in the family farm. A good, comprehensive Estate Plan should include documents designating the appropriate distribution of assets along with management of affairs in the event of the participant’s incapacity. Documents like Trusts, Wills, Durable Powers of Attorney, and Health Care Designations of Patient Advocate should be used to accomplish estate planning objectives. It is also important that these estate planning tools are integrated with the overall business plan.

Another valuable succession planning tool for farms are Business Entities. Part of a farm succession plan may include separating or compartmentalizing the ownership of farm assets into several different entities, such as “operations,” land, equipment, and other valuable assets. Compartmentalizing assets into different groups can help with the incremental transfer of assets to the next generation and can also result in more effective asset protection for the owners. Common business entities which should be considered are Limited Liability Companies (LLC’s) or Corporations.

When planning to transfer assets to the next generation, there are numerous concerns that both generations have. Often, the concerns of each generation has are at odds with each other. The current owners are often concerned that the next generation is not ready to shoulder the significant responsibility and are fearful of relinquishing control of the business operations. At the same time, the younger generation may feel unappreciated and are often not given any assurance that they will eventually become an owner of the farming business. Good succession planning will allow the older generation to transfer significant ownership to the younger generation, while retaining substantial control over the operations. With proper succession planning the tension between the older and younger generations can find a balance, to allow for successful succession planning to the next generation.

Because farm businesses are unique, it is important that farm businesses uses attorneys and other advisors that have a sound knowledge of the farm industry and are familiar with issues such as the Michigan Farmland Preservation Program (P.A. 116), the Michigan Land Division Act, and the real estate uncapping rules for Agricultural property and homesteads.

Sharon A. Burgess and Danelle E. Harrington practice in the areas of probate/estate planning, long term care planning and elder law, and business and real estate transactions at SMITH BOVILL, P.C. Their articles are intended to introduce various issues arising within this field of practice and are not intended to replace individual legal advice. If you have questions, please contact Sharon or Danelle at one of the firm’s two convenient office locations in Frankenmuth and Saginaw.