In my work with farm families, I realized that many of us mistakenly believe that estate planning and succession planning are the same thing. I didn’t really understand the difference between the two until I spent over a decade working as an educator.
However, knowing what plan you need and how to create one can have a big impact on how your farming business and your family function after you’re gone.
Succession plans pass on “things”
In 2012, I attended the National Agricultural Educators Conference in Memphis, Tennessee.
At the event, speaker John Baker, founder of the Iowa Beginning Farm Center, made a point of clarifying what is in an estate plan and what is in a succession plan.
To simplify, Baker described that an estate plan is sufficient if a farmer only cares about how to pass the land to the next generation. It’s easy to do, then each heir can take their part and go their own way. However, if the farmer wants his farming “business” to continue, then a succession plan becomes the priority.
At that moment, it really clicked for me. With an estate plan, you simply transfer title to your assets to your heirs when you die. An event, usually a funeral, sets an estate plan in motion.
During your life, the business was yours or that of the parents. Following your funeral, the business belongs to your heirs. Often, an estate plan will explain how to divide assets between siblings, but that’s where it ends. It does not include a guide on how to use the assets or operate the farming business.
When I’m helping a family develop a succession plan, the priority of seeing the business continue requires a much different approach.
Succession plans describe the future
In succession planning, we are forced to position the farm business to transition to the next generation.
This means we are focused on preparing the farm for financial success during and after the transition. We want to help the business stay intact, which requires a different approach to planning.
I say this often in my training programs, but it deserves special consideration: succession planning is a process, not an event. It’s about slowly passing the business from one generation to the next. It should have progressive goals over time.
There’s a reason I don’t want estate plans to be event-driven, like a funeral, as estate plans require.
If they do, the successors who have been involved in their family businesses may not be adequately compensated for their efforts, if something goes wrong before that event.
Use your estate to show the path you need to take to move from where your business is now to where you want it to be in the future. It should include goals and stops along the way.
At each stop, the successor gains management experience and has greater responsibility in decision-making.
During this process, your parenting role changes from that of chief decision-maker to that of chief mentor and support.
Choose the right package
Data from the US Small Business Administration shows that a productive business sold to non-family members has a 70% chance of succeeding under the control of the new owners. The success rate drops to 30% for businesses whose heirs, such as children, inherit and operate.
For agricultural operations, the difference in success rates can at least in part be attributed to operators confusing estate planning with succession planning. Instead of thinking about how to prepare the next generation to run the business, they just divide the assets.
As Baker taught me many years ago, if you just want to leave your assets to your children and let them do whatever they want with them, then an estate plan is probably all you need. But if you really want your heirs to have a chance of keeping the business alive, your planning process is more difficult. You need to start early and develop a succession plan. Good luck!
Tucker is a Business Specialist and Estate Planner with University of Missouri Extension AG. He can be reached at [email protected] or 417-326-4916.