Succession Planning with Non-Family Partners

By Callie Curley, Contributing Writer

That's a line Brandon Dirkschneider, managing principal/president of Insurance Design Management, hears often from landowners before they've taken the first steps toward planning for the next generation on their farm. But what if your kids don't want to manage the farm after you're gone? What if you don't have any children at all? According to Dirkschneider, "That's when you're looking not so much at a succession plan, but an exit strategy." can all begin working toward the same goals." Changing the course of the farm and ranch operation often requires a willingness to change and to face some truths about ourselves and the situation at hand. "We don't like perceiving we have less control over something we've spent our lives building, and there is no doubt that these conversations can be hard," Dirkschneider says. "But making these plans actually ensures you have more control than you would without having a plan in place." Agree on the Goals Starting the conversation involves personal reflection by everyone involved before they can commit to agreeing on the goals and how those goals should be carried out. If there are children who don't wish to manage the farm, "The matriarch and patriarch of the family need to be on the same page and in agreement with the goals of the process," Dirkschneider says. If there are children who don't wish to manage the farm, they should still be part of the conversation to best understand the "why." Allan Vyhnalek, recently retired University of Nebraska-Lincoln Extension educator who spent years focused on farm transition and succession planning, encourages landowners to view their exit strategy as being completely separate from their "retirement." "Many of us put off planning for the future because we don't have any interest in retiring." Vyhnalek says. "Planning for the future is not rushing anyone into retirement. It is preparing our family and our assets for the inevitable end of our lives." Regardless of whether the next generation is family or not, the whole process has to start with a conversation. Start the Conversation Rest assured. This first step is almost definitely the hardest. That's because, in Nebraska, landowners who have not established an estate and succession plan at the time of their death are subject to intestacy laws, which predetermine how your assets are distributed and to whom, without consideration to your family's needs or situation. Dirkschneider's question for all land- owners: "Who would you rather decide how your assets are going to be distributed? Some predetermined state statute or you?" What's Most Important? According to Dirkschneider, assessing what assets should be retained and what is no longer needed is a good place to start. "The first thing you should look at is your equipment," he says. Many farm families have taken ad- vantage of Bonus 179 depreciation for equipment they've purchased in the past several years, allowing them to avoid paying higher federal income taxes. Not having a next generation means that equipment won't be needed and selling means needing to recapture all the bonus depreciation as ordinary income and pay the respective federal and state income tax in the year the sale takes place. "Suddenly, you're in the highest tax bracket and losing the majority to taxes," Dirkschneider says. So, how can you plan for your exit while minimizing the tax liability you'll face? Work With Professionals Whether you haven't developed any legal documentation of estate planning or it's been prepared for decades and not reviewed since, there is undeniable value in working with a team of professionals who will ensure your documents are in line with ongoing changes made by legislators and serving the best interests of you and your family. "Every time legislators are in session, it seems like something changes that affects the validity of these important agreements," Dirkschneider says. "Working with a team helps to protect your assets and ensure your intentions are carried out." PLANNING FOR THE FUTURE

WITH NCIG Managing a successful operation takes time, strategy and planning years into the future. Estate planning and succession planning is equally important. Family farms account for 98 percent of U.S. farms, but only 10 percent of second-generation farms survive to the third generation. Unfortunately, more than half of operators planning to retire in the next five years do not have a succession plan. Leaving an equal share of the farm or ranch to each child may not always be feasible, especially since operations are asset rich and cash poor. Life insurance benefits can help provide a more equitable inheritance, allowing children who are not taking over the farm to receive their fair share. Children who are taking over the farm can purchase a policy to fund the purchase of the farm. It's crucial to discuss plans with your children, explaining the reasoning behind the choices made and the care taken to be fair. By planning ahead, communicating with family members and seeking professional advice, you can help ensure a smoother transition of ownership and a more sustainable future for your operation. NCIG offers Nebraska beef producers risk management services through a partnership between Nebraska Cattlemen and FNIC. Members have access to a variety of carriers with competitive rates and support from licensed professionals in claims, loss control, safety and compliance. Learn more at nebraskacattlemen.org/ncig.▪▪ Communicate, Communicate, Communicate

"When there's a problem in farm succession planning, it's always either bad communication or no communication at all," Vyhnalek says. Whether the stakeholders in your operation are your family or non-family partners, clear and consistent communication is of the utmost importance. This includes timelines, phases of transition and being upfront about the financials and other business details you may be accustomed to keeping to yourself.

Foster Your Relationships "If you're a landowner, especially in agriculture, you're probably a long- standing member of your community," Dirkschneider says. "You get to know the people around you, and you know who you trust and align with. Those are the people you need in your corner for these big decisions." Leaning on those connections to identify someone who could manage your farm for the next generation can be as simple as asking if they know anyone seeking an opportunity and who might be compatible with your management style. If no one in your community comes to mind as a potential future partner, there are other resources available. Nebraska Land Link, https://cap.unl.edu/landlink,

a joint venture by Nebraska Extension and the University of Nebraska-Lincoln Department of Agricultural Economics, is an online tool that allows landowners and land seekers to connect and form partnerships. "When there's a problem in farm succession planning, it's always either bad communication or no communication at all." - Allan Vyhnalek What is the most important in this process is setting (and clearly communicating) the terms of the agreement.

"Matching with a land seeker is not the same as hiring a laborer," Vyhnalek says. "You'll need to work together to define the terms of your agreement, including a testing phase, a management phase and what future transfer will look like." It's Never too Early to Plan Even if you see yourself farming for another 10 or more years, there is value in starting the conversations and getting plans in place.

''With just three to five years, you can plan your exit proactively and mitigate the tax liabilities associated with your exit,'' Dirkschneider says. '' Waiting leaves you open to the risk of the unexpected, and will almost undoubtedly be a higher financial cost.

It also allows time for those involved to think through important tactical questions. Managing the sale of equipment, prepaid input costs, sale of grain in storage and managing the transition from active to passive operator, or bringing on a tenant to continue farming the land are all topics worthy of thoughtful discussion. FAILING TO PLAN IS PLANNING TO FAIL

Five reasons farm and ranch transition plans fail:

1. No current estate or succession plan

2. Inadequate estate or succession plan

3. Insufficient capitalization

4. Failure to properly prepare the next generation

5. Failure to communicate and understand the "why"