Passing on a Pecan Farm from Generation to Generation
Given the amount of time it takes to build a pecan tree from a seedling into a fully producing asset, most pecan farmers want to make sure that their orchards get passed on to the next generation without succumbing to bad planning. You have worked so hard to build your asset over decades and don’t want to become one of the horror stories that abound of farms that have been destroyed from bad planning. This is where the great value of long-term estate planning can be beneficial.
The first step to ensuring that you maximize what is likely one of your greatest assets is to figure out what you would like life to look like when you decide to stop, be that due to retirement or death. Are you hoping to have the farm pass down to your son, your daughter, or another important person in your life so that they can run it? Or, are you simply looking to maximize your wealth while you are alive and leave cash to your heirs? It is important to start thinking about these things now, no matter your age.
Should you wish to continue the legacy of your farm for generations to come, the first step is to have a conversation with the person or people you hope will inherit your pecan production and keep the operations going. Are they interested? If no one wants to inherit the pecan farm, it is important to know that sooner rather than later.
We understand that these conversations are infrequently or not occurring at all in many cases, which amplifies the messy process of transitioning the farm to the next generation A lackluster or nonexistent plan can tear the strong family bond apart at one of the most challenging times in a family’s life—the death of a loved one and a provider.
I am proud to say that I grew up on a family farm, and I know firsthand how these conversations can go. They involve tough decisions like how to make things equitable among children who may not want to be involved; what is fair for the children who aren’t going to be involved, especially when you can’t be equitable; when to time the transaction, especially when concerned about being set in retirement; and how to let go of decisions when you hand over the reigns.
The nice thing about estate planning for illiquid assets like farms is once you answer the hard questions and determine who you want to get what, you can make anything happen. Here are some important things to consider for your heirs inheriting the farm:
- If the person who dies lives in a different state than the farm, consider putting the farm in a revocable trust. This type of trust avoids probate in more than the state where the person who died lived and will make transferring the farm upon death potentially easier and less costly.
- If your farm is worth more than the state or federal estate tax exemption (i.e. you will owe estate or inheritance taxes), consider getting whole life insurance to pay the taxes upon your death so whoever inherits your farm doesn’t have to sell part of it to pay those taxes. This is less of an issue at the federal level than at the state level.
If you are looking at passing the farm along to several generations and believe that the estate may be worth close to the estate tax exemption limit at either state or federal, then you might consider putting it in a generation skipping trust. This will potentially allow the farm to pass estate or inheritance tax free for generations.
If you do not have anyone to inherit your farm or decide you want to sell, it is important to remember that this is potentially an irreversible decision. Once you sell the farm, it is difficult to buy it back.
If you do decide to sell soon, it is important to be prepared and start to gather more information about:
- What is the market for mature orchards in the industry? Is it a good time to sell or not?
- Can you identify a potential buyer?
- What will a potential buyer find most attractive about your particular farm?
- Can you reduce your expenses and increase your profits in the near term to make the farm more attractive to a buyer?
- What do you need to receive from the proceeds of the farm to be OK?
If you decide to sell at your death, it is important to consider the following:
- Can you identify a buyer? Can you come to terms around a sale at your death?
- Is it worth taking on a partner in the business with the idea that whoever survives agrees to purchase the remainder of the farm at a specified price (this is called a buy/sell agreement)?
Think about the first tree you planted to now when you have a productive orchard. It takes no imagination to understand the pride of watching that growth or the satisfaction of bringing in a harvest. However, it does take imagination to see the future of a farm operation. A future where you are not part of the farm anymore.
Have you taken the time to imagine your operation if you were no longer here?
In the November Issue of Pecan South Magazine, John will be discussing ways pecan farmers can minimize taxes in light of the recent tax law changes.