A letter to farm parents

Twohig.tifHopefully, you bought the home farm when cattle, equipment and land prices were reasonable. You may have farmed in the ’70s, when more of the income went to the bottom line so debt could be paid off in a reasonable time. You may have farmed and bought additional land in the ’80s and ’90s, during that difficult period of flat milk prices, high interest rates and rising costs of operation. You may have invested in an expansion for additional necessary income, and in other improvements for cow comfort, efficiency or just to meet new rules.

It took courage to take those risks and commitment to keep your farm competitive and a good opportunity for another generation. Sometimes you wonder if your children really understand what it took to build your family farm.

Because of your hard work, you own more cattle, equipment, facilities and land all at highly inflated prices. Milk prices, which seem to cycle every three years, and commodity prices haven’t kept pace with rising operating expenses and costs of living. You find yourself heavy in farm assets, which you never intend to sell, and with limited cash flow that needs to be reinvested every year.

Today, you have a son, daughter or maybe even several children who share your passion for the family farm. It has become both your and their legacy. Your on-farm children may not have been ready to take over in their early 20s, but by the time they are in their 30s or 40s, they need to be assuming management roles and obtaining ownership.

Transferring assets

The high value of farm assets and often underlying debt create a dilemma for parents who want to transfer their farm to the next generation. Your on-farm children can’t realistically afford to buy out an equal share from their off-farm siblings based on current market values. The dilemma is how to treat your off-farm children fairly while still allowing your on-farm children to eventually acquire ownership of the farm.

It is also difficult to balance your need for financial security and adequate income, the on-farm family members’ need for income, and the farm’s need to reinvest and to pay down debt. Another challenge is balancing your desire for continued participation with the transfer of management and ownership to your next generation of farmers. A poorly planned transfer often leads to resentment, rivalry, insecurity and unresolved conflicts that adversely affect family relationships.

As parents, you must provide the leadership. Show your on-farm children that you are committed to planning and effectuating the farm’s transfer. Start the planning process if you haven’t yet. Help develop a culture of good communication, openness and mutual respect. Surround yourself with the best advisers who will facilitate meaningful, and often difficult, discussions, and will provide practical, time-tested solutions. Work with your children and advisers to establish business structures that permit the on-farm heirs to acquire equity over time while allowing adequate income to be reinvested in the farm. Develop and execute an effective estate plan.

Finally, you need to regularly update your transfer plan as change is constant. Out-of-date options in buy-sell agreements or wills (or living trusts) may no longer work at today’s asset values with limited cash flow.

Twohig is a partner in Twohig, Rietbrock, Schneider & Halbach S.C. in Chilton. The firm specializes in ag law.

This article published in the February, 2010 edition of WISCONSIN AGRICULTURIST.

All rights reserved. Copyright Farm Progress Cos. 2010.