When people think about business succession planning, they don’t necessarily expand that topic to include family farms, but farms – like any small business – absolutely need to plan for what the owner wants for the future, says Dan Owen, a certified financial planner at Northwestern Mutual’s Wilmington office.

The office has recently expanded its focus on the issue to include family farms.

Farm owners have two options, Owen said: plan to hold onto the farm until they die and have it transferred via an estate plan or find a purchaser when they are ready to retire.

“In the second case, all of a sudden this thing the farmer built will turn into cash,” Owen said. “From a financial planning viewpoint, how do you use that cash? Some farmers are very savvy but may not know much about investing.”

In doing succession planning, farmers and other small business owners need to think about what role, if any, family members will assume when the owner retires or dies.

“We work with a farmer outside Wilmington,” Owen said. “His three children work on the farm, each with a separate role: row crops, livestock and administration. He is the overseer. His goal is ‘How do I make sure they each end up with the right piece of the farm?’ All of this planning is being done, not because of estate taxes, but to make sure [the next generation] can continue to work together without a supervisor. There is that same dynamic in any business.”

The farm in Owen’s example, like many others, has a number of nonfamily employees, and all the normal concerns about providing incentives to keep them – benefits, funding retirement, vacations – come into play, Owen said. Incentives are even more important as the farmer looks ahead to his or her retirement.

“He has incentive plans to keep them, including a bonus at his
retirement, seven years from now at 65. One employee is a potential purchaser,” Owen said.

If the farm, on the other hand, were to pass to the farmer’s adult children, estate taxes might be so high that they would be forced to sell.

“Proper estate planning allows a low-liquidity situation to avoid high taxes,” Owen said.