Estate Planning and Succession Planning for a Family Farm

November 9, 2023
Multigenerational family of farmers stand in cowshed on sunny day .

Farm and ranch real estate and related livestock, equipment, and other personal property face unique challenges in succession and estate planning. There is a common misconception that federal estate taxes threaten farm or ranch property, preventing assets from getting to rightful heirs. Over the past 20 years, legislation has managed to ease the estate tax burden.

According to the current Tax Cuts and Jobs Act (TCJA), tax exemptions will remain at $12.9 million per inheritor until 2026. Although farm assets may require filing a federal estate tax return, debts against assets will lower the final estate value. Depreciation will protect the estate from excessive valuation and taxation.

Assets and Reinvestment Strategies

Farm or ranch assets typically fall into three categories:

  • Business
  • Retirement
  • Inheritance

Much of the tangible assets come from reinvesting most farm profits back into the business to build capacity and maintain or modernize buildings and equipment. Reinvestment can also expand the operation’s size to capitalize on economies of scale. However, too much reinvestment may unbalance other asset categories, particularly retirement.

Succession Planning

You may have a successor already working in the business. Perhaps you have a family farm hand in training to one day run the operation. They might assume there is a plan in place to make business assets affordable and accessible when they take over the farm. Yet, there may also be off-farm heirs, and the owner may include farm assets to serve as an inheritance.

What happens to this inheritance if the focus is on the business and retirement assets? Early and careful succession planning is necessary to determine how best to balance the farm’s business, retirement, and inheritance goals.

Property inheritance is common within farm and ranch families. There is an emotional symbolism attached to the property transfer from generation to generation. Throughout the years, the farm or ranch may come to symbolize love, trust, power, history, and family rituals.

Identifying the right course of action and making estate planning decisions can be a daunting task with so much legacy investment. Because of these emotional attachments and complexities, many farm owners mistakenly do not create a plan.

Why Estate Planning Is Important for Farmers and Ranchers

Without estate planning, owners leave the farm subject to the state’s succession plan. In these cases, the assets are typically divided equally among the heirs. This equal distribution of farm assets increases the chance that the on-farm successor will not have all the farm assets required for business operation.

In time, this situation will impede the farm’s ability to grow. It could put the business at risk of failing, as the on-farm successor must buy sibling inherited farm assets back at near full market value.

Most farms do not generate enough cash flow for the successor to purchase the farm assets outright. This situation puts the farm business in the position of having to pay for its assets twice to cash out off-farm heirs’ inheritance.

Statistics Regarding Heirs and Asset Division

Oklahoma State University developed a statistical model comparing probabilities of success rates of various farm inheritance transfer strategies. The lowest success rates most often occur when farm assets are divided equally among heirs. As an owner, you may want your farm or ranch legacy to continue as a working business. If so, your estate planning strategy needs to be more creative.

Three guiding principles can help an owner think through fair and practical distribution decisions:

  • Equality principle – Regardless of contribution by each heir, assets will divide equally
  • Proportional equality principle – Asset distribution is contingent upon individual heir contributions in maintaining or growing the asset
  • Need-based principle – Those heirs with more need receive primary consideration

Making the Right Decision

Farm families generally incorporate all three of these principles to varying degrees. Updating the estate plan may change the decision-making emphasis dependent on fortunes outside the farm, goodwill, and necessity. Like many decisions in life, timing is everything. An experienced estate planning attorney can readily amend your plan to meet shifting challenges and fortunes.

However the farm or ranch owner decides to split assets, one of the most important aspects of estate planning is an honest appraisal of the farm’s financial capacity to continue as a family business and achieve its goals. If the goal is the continuation of the family farm for subsequent generations, then the equal distribution of farm assets is not a tenable solution.

Communication Is Critical

The owner generation must communicate expectations to family members, presenting clear goals to ensure a smooth future transition. The more that off-farm heirs understand the decision-making process, the better. That way, you are managing everyone’s expectations and helping to reduce the possibility of family conflict after the owner passes.

Take time to identify and document near and long-term goals for the farm or ranch business owner. Consider how these goals will affect family heirs. These insights can help make clearer the pathway to success clearer.

A qualified estate planning attorney can take your goals and financial information and structure an estate plan that will preserve the business without unnecessary family conflict for heirs who are not in the farm or ranch business.

The sooner you begin planning, the easier it will be to accommodate all heirs while preserving the family legacy. Life insurance policies and other techniques can provide inheritable money to off-farm heirs while permitting the farm to continue operation, keeping your legacy intact. Contact an estate planning attorney today.