In my work with farm families, I’ve realized many of us erroneously believe estate planning and succession planning are the same. I didn’t really grasp the difference between the two until spending more than a decade working as an educator.
Knowing which plan you need and how to create one, however, can greatly affect how your farm business and family function after you’re gone.
Estate plans pass along 'stuff'
In 2012, I attended the Women in Agriculture Educators National Conference in Memphis, Tenn.
At the event, speaker John Baker, the Iowa Beginning Farm Center’s founder, made a point to clarify 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 is only concerned with how to pass the land to the next generation. It’s easy to do, and then each heir can take their portion and go their separate ways. However, if the farmer wants to see their farm “business” continue, then a succession plan actually becomes the priority.
At that moment, it really clicked for me. With an estate plan, you simply transfer the title of your assets to your heirs when you die. An event, typically a funeral, puts an estate plan into motion.
During your life, the business was yours or the parent’s. Following your funeral, the business assets belong to your heirs. Often, an estate plan lays out how to split assets among siblings, but it stops there. It doesn’t include a guide for how to use the assets or keep the farm business going.
When I’m helping a family develop a succession plan, the priority of seeing the business continue requires a much different approach.
Succession plans outline future
During succession planning, we are compelled to position the farm business to transition to the next generation.
That means we focus on preparing the farm for how to succeed financially during and after the transition. We want to help the business stay intact, and that requires a different approach to planning.
I say this often during my educational programs, but it deserves extra emphasis — succession planning is a process, not an event. It involves slowly transitioning the business from one generation to the next. It should have incremental goals over time.
There is a reason why I don’t want succession plans to depend on an event, such as funeral, like estate plans require.
If they do, then successors who have been involved in their family businesses risk that they won’t be adequately compensated for their efforts, if anything happens to go wrong before that event.
Use your succession to show the path to get from where your business is today 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 experience in management and has greater responsibility to make decisions.
During this process, your role as the parent transitions from one of chief decision-maker to chief mentor and supporter.
Pick right plan
Data from the U.S. Small Business Administration show that a productive business sold to non-family members has a 70% chance to succeed under the new owners’ control. The success rate drops to 30% for businesses that heirs, such as children, inherit and operate.
For farms, the difference in success rate can at least partially be attributed to operators mistaking estate planning for succession planning. Instead of thinking through how to prepare the next generation to run the business, they only divide up assets.
As Baker taught me many years ago, if you just want to leave your assets to your kids and let them do what they want with them, then an estate plan is probably all you need. But if you truly want your heirs to have a chance at keeping the business alive, then your planning process is more difficult. You need to start early and develop a succession plan. Good luck!
Tucker is a University of Missouri Extension ag business specialist and succession planner. He can be reached at [email protected] or 417-326-4916.