A lot is being written about the transfer of wealth, as Baby Boomer’s retirement accounts begin to be passed on to their children. However, another big generational transfer has begun. The U.S. Department of Agriculture says that nearly 10% of the nation’s nearly 100 million acres of agricultural land will change hands in the next few years, as a new generation of farmers and ranchers takes over these properties from their parents.
As reported by Agweek in the article “Ranching and retirement: Succession planning becomes vital,” the average age of U.S. farmers and ranchers is 58.3 years old. Just three decades ago, the average age was 50.5 years old. Agriculture is in a transition phase and families need to focus on succession planning.
Farmers and ranchers, referred to as “producers,” often say that they’ll stop farming, when there’s a funeral date on the calendar. That attitude may be changing, as second, third, and even fourth generation farms are evolving. There are new leaders for the next generation, who have new ideas about how farms can be run. Many older producers are getting ready to pass the reins along and retire.
The focus on succession planning used to leave the older producers and their retirement plan as an add-on, something that got addressed, when the division of the farm and assets was completed. In many cases, it got left out altogether. However, questions about how they will live in retirement are now coming to the forefront.
Producers who begin planning on succession, understand that their plan must include their retirement and how they’ll support themselves in what could be a two or three decade-long retirement. How can the family continue to operate the farm, grow it to support the generations, but also provide the oldest members of the family with a comfortable retirement?
Cash flow for retirement is the first focus. The families need to determine how they can generate passive income. Some families put the operation into an LLC or general partnership, so that business assets and income flows through that entity. This also creates a smoother path to ownership for the next generation. The land can’t be rented to the farmer directly, but it can be rented to the LLC, which generates cash flow. It is passive income, so it won’t make the farmer ineligible for Social Security and is not subject to the self-employment tax.
Families need to determine the true value of the farm and if it can produce income for another family, while supporting the older generation. This takes planning, and considerable discussion. The family must also work through what their strategy and vision is for the land and the families.
Every family is different, and farm and ranch families face many different challenges. Once the family has a clear vision of the future, they should all meet with an estate planning attorney, who works with farm and ranch families. They can guide them through this process and ensure that their plan aligns with the future for all generations.
Reference: Agweek (Dec. 3, 208) “Ranching and retirement: Succession planning becomes vital”