Develop farm succession plan to facilitate transition

STILLWATER, Okla. — Now is the time to complete a farm succession plan because no one knows when the plan will be called into action.

“Your ranch will go through a transition,” said Shannon Ferrell, professor of agricultural law in the Department of Economics at Oklahoma State University.

“It will definitely happen when someone dies or it can happen at some point of your choosing, so the only rational time for us to act is right now,” said Ferrell during the Continuing a Legacy: Succession Planning for Cattle Producers webinar, hosted by the National Cattlemen’s Beef Association.

“Not acting is a choice, and if we don’t act, choices will be made for us,” he said. “What we choose, if we don’t do a plan, is a broken ranch and a broken family.”

There is a slim possibility, Ferrell said, that it might miraculously work out.

“But it is more likely that the ranch will be sold at auction, family members will get their check and they will walk away and never talk to each other again,” the university professor predicted.

“And if you have an heir that is interested in keeping the ranch operating, that person will be facing a really tough battle to keep the operation together,” he said.

“I understand that ranchers are busy people, there is always something to be done — cows to be fed, a crop to get in, a fence to be mended or a truck to be fixed,” Ferrell said.

“You say that you’ll get around to it some day, but some day is not on the calendar,” he said. “So, you have to be proactive and start working on this now.”

Everyone needs to have a will, Ferrell said.

“It provides instructions on how to distribute your property after you die,” he said. “It doesn’t matter if you have a lot of stuff or you don’t have much stuff at all. Everyone can benefit from having a will in place.”

Ferrell encourages anyone who has an investment account, savings account or insurance policy to take advantage of the opportunity to designate a beneficiary.

“Then it doesn’t have to go through the probate process,” he said. “Anytime you get married or divorced or someone is born or dies, make sure you check your beneficiary designations.”

Developing these documents can be challenging and sometimes scary things for people, Ferrell admitted, because they require thinking about dying or being injured.

“But you owe it to your loved ones to have the courage to do this work, so get it done,” the agricultural law professor said.

“Farm and ranch succession planning is so different because farm assets don’t divide in a way that other assets do,” Ferrell said.

“If we give the ranch in equal shares to a ranch kid that wants to come back and operate the farm and to a city kid that has no interest in that, we are requiring the ranch kid to buy the city kid’s share,” he said.

If assets are split down the middle, only when someone dies, the professor said, it becomes much more expensive for everybody involved versus being proactive and developing a business transition plan.

“That creates more opportunities to use time as our advantage and makes things a lot more affordable for everyone,” Ferrell said.

“Nobody thinks about who is paying for the lack of planning,” he said. “We often think we’re giving the next generation a significant gift, when we may be giving them a significant burden by making them buyout someone because we did not have the conversation or plan in place.”

Since preparing a farm succession plan can be a complicated concept, Ferrell encourages families to take one step at a time.

The first step is to take an inventory of all the assets including real estate, personal property and financial assets.

“This will jump start your transition process,” Ferrell said. “Then inventory the people that have an economic stake and an emotional connection to your operation.”

“You need to inventory everyone’s goals and values,” he said. “If people have incompatible goals and values, they do not need to do business together.”

The next step is to have a talk to understand the perspective and expectations of family members.

“If we don’t have the conversation, people will fill in the blanks about our intentions and they are going to wonder why we did what we did,” Ferrell said.

This meeting should not happen on Christmas Day at mom and dad’s house around the dining room table.

“You cannot have an honest and open conversation because it is a special day and a special place,” Ferrell said. “So, have the meeting in a neutral place where everybody feels comfortable to be honest about what they want to say.”

The goal of the business succession plan is to move the business ownership and management from who owns it now to who is going to own it later.

“We are doing that while the farm is still operating, so it is tricky, but it can be done,” Ferrell said.

“I have become a bigger fan of prenup agreements because people are getting married later in life and there are more assets involved,” he said. “So, it can become an important risk management tool.”

Professionals can help farm families develop their succession plans.

“An attorney who understands business planning can help us put the tools we need in place and an investment adviser can help us make sure we have the risk management and savings tools that give our operation flexibility,” Ferrell said.

“If we know things will be contentious, let’s invite a mediator to make sure our conversations are honest and also productive, fair and respectful,” he said.

“If we are in the ranch business, we are in the life and growth business,” he added. “If we wait until we die for the transition to take place, we will never see the success of the next generation. But if we do it when we are alive, we get to experience that joy with our family.”