Operational Succession Planning – Part 2 of 3
Operational Succession Planning – Part 2 of 3
April 19, 2016

Key Areas to discuss as you formulate your plan are the Successor(s), the Structure and Management Continuity.

Questions to consider when selecting a Successor(s):

  • Will all of your children be involved with the day to day farming or business decisions?
  • Will you have some children involved with the farm or business decisions and others not involved?
  • How do you balance “Equality” and “Fairness” for your children?

Most all parents want to treat their children equally. Is that fair to the children working the farm or business everyday, helping to build up the business? If you have some children working on the farm or business and others that do not, then what are your options? Not every child needs to inherit equal shares of all assets.

When do you involve the successor(s) in management? The answer is the sooner the better!!! Agriculture in general has the unusual business practice of a 70 year old owner still managing the day to day operations, and a 50 year old working the fields and not part of management. The successor(s) need to be involved. Again the sooner the better!!

If you have no successors then will you sell? Who is the potential buyer? Is it a competitor? Do you lease to another farmer or business owner? Is there something else? Preparing for a sale will take additional planning, so again, start thinking sooner rather than later.

What should the structure be? How do you allow the operation to maintain integrity and control while providing equality? Sometimes we use separate LLCs, one to operate and hold equipment and a second one to hold the real estate. We typically have the Operating LLC owned by the children involved in the farm or business and the Real Estate LLC owned equally by all children. The children not involved in operations can then inherit more non-farm or non-business assets to equalize their inheritance.

This brings up the fairness issue. The children running the operation don’t want the non-operating children as their landlord, setting their rent for the real estate. Sometimes we use long-term leases to handle this. An alternative is to use “Voting” and “Non-voting” units in the real estate LLC. This is an overview of how to handle equal versus fair. Each situation will need to be analyzed to determine what will work best for you.

A general planning note is DO NOT put real estate into a corporation, LLCs are the preferred entity. There is double taxation in a C-Corp. Pulling assets in and out of corporations will create taxes vs an LLC which has greater flexibility in this area. The facts of each of your situations will dictate what structure will work best for you.

Management Continuity is an important part of succession planning. What is your current vision for future operations? What is the successor’s vision for future operations? Are they the same as yours? Do you meet regularly, with all parties at the table? They don’t have to be formal meetings. One annual meeting should be done to review the operations, vision for future operations, the strategic plan, etc.

In farming, conflicts may arise from differences such as crop choices, market opportunities, GMO vs. Non-GMO, equipment needs, etc. Equipment purchases are an example for all types of businesses.

Some operators will buy equipment based on:

  • “Wants” vs. “needs” – they love the latest and greatest!!
  • Some, believe it or not, just don’t want to pay any taxes – the year end shuffle for equipment.
  • Yet others may actually buy equipment based on the economics of whether the operations need the equipment. This is the best way.

All should be discussed at these regular meetings. The continuity of management between generations is very important. This is all part of management training.

Treasury Circular 230 Disclosure

Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.

Get updates sent to your inbox.
Sign up today to receive a free consultation or sign up for our editor's newsletter.
Back to Top