Assets can be defined as tangible or intangible. Tangible farm business assets include land, equipment, facilities, livestock, and tools. Intangible assets include leases, ownership interests in the farm family business, good will, and reputation. The value of tangible assets can be defined as their fair market value. It is more difficult to value intangible assets as the fair market value may be difficult to determine. This does not mean that tangible assets are more important or valuable than intangible ones. Reputation and goodwill may lead to business opportunities that wouldn’t be available otherwise.

Transitioning Assets

Six fundamental questions concerning transitioning assets to a succeeding generation must be thoroughly evaluated and answered. The first three questions, about the owner generation, gather the information that is needed to answer the last three questions, which are about the succeeding generation.

1. What assets are owned by the current generation?
2. How does the current generation own the assets?
3. What is the net fair market value of the assets?
4. Who in the succeeding generation will own the assets?
5. How will the succeeding generation own the assets?
6. When will the succeeding generation obtain ownership of the assets?

The first question is answered by taking an inventory. The inventory should include real property: land and anything affixed to the land. All other property is personal property. Personal property includes tangible property and intangible property. Tangible property includes machinery, equipment, tools, livestock, and other physical property. Intangible property includes leases, investments, retirement plans, and other nonphysical property.

In answer to the second question, assets may be owned by a sole owner, by joint owners, by common owners, by businesses entities, or trusts. State law will govern the length of time that a trust may exist and control the assets placed in the trust. Only the degree of ownership of the assets can be transferred to the successor.

The third question is answered by determining fair market value. It is determined by an arm’s-length transaction where neither the seller nor the buyer is compelled to act. The net fair market value is determined by subtracting any debt that is attached to the property.

The fourth question concerns to whom in the succeeding generation the farm business and personal assets will be transitioned. To answer that question, consider these questions: Has a successor to the farm businesses been identified? Is the successor actively involved in the farm business? Are there multiple successors to the farm businesses? If there are multiple successors, are they actively involved in the farm business?

Think about these questions to answer the fifth question: Will the successor(s) own the assets as sole owners, joint owners, or common owners, or will the successor(s) own interests in the business entity(s) that own the assets? Will the successor(s) be the trustee(s) administering the trust?

The final question is: When will the successor(s) obtain ownership of the assets? Once again, thinking through some other questions can help to answer that. Will it be during the life of the current owning generation? Will it be immediately upon the death of the current owners? Will it be upon the death of a joint or common owner? Will it be at a date set forth in a trust document? If the business assets are divided between the business successor(s) and individual/individuals not involved in the business, how will the successor(s) obtain ownership of those assets? Will the successor(s) pay fair market value for the assets, or will there be a discount in the purchase price? Will they have a first option to buy, a right of first refusal, or will there be buy/sell agreements in place?

Transitioning Management

The second component of a family farm business is the management of the family-owned assets. The management component has two constituent parts: structure and control. Concerning structure, is the farm business a sole proprietorship, a partnership, a business entity, or multiple entities for a separate business or separate businesses? Business entities are used to manage risk, enhance financial management, and concentrate management of each entity.

The second constituent part of management is control. There are important questions to consider about control. Who makes the decisions concerning the business and how are such decisions made? Does one individual make the decision or are decisions made by a process of consultation and collaboration? Who participates in making decisions? What factors are considered in making decisions? Who makes the short-term and who makes the long-term decisions?

Transitioning Income

The last component of a family farm business is income. How is the income distributed to those who are involved in the farm business? Salary, hourly wage, profit sharing, fringe benefits, and expense reimbursement are methods of income distribution. How are expenses allocated and who is responsible for the payment of those expenses?

Is the income used to expand the business, fund retirement for the current owning generation, pay down business and personal expenses, or saved for unanticipated expenses?

Values, Vision, and Intentions Are the Lynchpins to Planning

Each of the three components (assets, management, and income) as described above are technical and transactional in nature. In many ways they describe two of the three steps in the three-step process outlined in the Cultivating Your Farm’s Future workbook. The descriptions above provide very brief definitions of the “Where is the farm now?” step and also the very final steps in “How do we get there?” However, the key step that is often overlooked is the middle step of “Where do you want to be?” This second step is the lynchpin to the farm succession planning process. It requires strong communication skills and deep reflection that takes many farm owners and family members out of their comfort zones.

To create a sustainable succession plan, the family and farm members can use their values, intentions, and vision as a basis for decision-making and informing the transactional aspects of the plan.

Values

Values are single beliefs, limited in number, and shaped by our experiences and relationships. Certain core values remain unchanged over long periods of time and have a major impact on decision-making. When values are identified, decisions become clearer because the focus of the decision maker is on what is important over a longer period of time.

A value system is an enduring organization of beliefs that define and set individual conduct. Values and value systems tend to link people by creating and encouraging commonly shared experiences and relationships and the standards by which we make judgments about ourselves, others, and situations.

While core values may not change over time, their priority might. Past decisions, made on the priority values at that time, may no longer reflect the current priority values. It is not unusual to have conflicts between values, because attaining one value may mean that another value becomes unattainable.

Many core value activities have people circle a set number of words and prioritize them. The activity in Cultivating Your Farm’s Future suggests additional steps to clarify core values further. This activity asks people to write an outcome statement and list a set of behaviors that demonstrate the value. This allows further and deeper understanding of each family member’s definition of living their priority values.

Vision

A Japanese proverb provides a great perspective about creating a vision for your farm succession: “Vision without action is a daydream. Action without vision is a nightmare.” Developing a shared vision for farm succession is a first action to changing it from a daydream to a concrete idea for the future. You may find it daunting to have a blank sheet of paper or a blank screen in front of you and be asked to write a paragraph describing your vision for your life and the farm business. It can be helpful to start by answering a few guiding questions about your daily tasks, responsibilities, and income sources for your household expenses. For the business side, questions about size, enterprises, decision-making, and ownership can help organize farm members’ ideas about the next 3 to 5 years. If goals, visions, and timelines for the farm don’t match, much more discussion is required to determine if a succession plan is possible at this time.

Intentions

One definition of the word intention is: “An idea that you plan (or intend) to carry out. If you mean something, it’s an intention. Your goal, purpose, or aim is your intention. It’s something you mean to do, whether you pull it off or not.” (from https://www.vocabulary.com/dictionary/intention)

Farm owners and successors can have lots of intentions about transitioning assets, management, and income. Some may be more important than others. And they can be different within couples and between generations. Each member of the farm should examine their own intentions, discuss them with their spouse/partners, and then share them with the other generations.

Some of the intentions or goals of the owner generation may revolve around the legacy of the farm. They may want it to continue to be owned by the family. Or it may be more important that it continues as a farm, no matter who owns it. The owner generation may be dependent on the assets for their later years, and they may also want to provide a discounted price to the successor. While these intentions may conflict, they do allow for further discussion if they are identified early in the process. Examining intentions can also uncover inheritance distribution goals.

For the successor generation, evaluating intentions can be especially important if there are spouses or partners coming along with the successor. Is the spouse or partner willing to make financial goals that prioritize the farm, or do they have other financial goals that need to be considered as they plan their future together? The successor can evaluate their intentions around developing their management skills. Another area of friction that can be identified during this phase is the goals of the individuals for vacation time or time away from the farm. It may seem a trivial topic when considering the transition of assets, management, and income, but not talking about time away can derail the best transactional planning.

For many farms, starting with a vision development activity helps the members with their first meaningful conversations about farm succession. Developing intentions and core values can be used as tension points arise. There is no one-size-fits-all in succession planning. Each farm can decide which activities or conversations seem most helpful to them in any order; however, completing these three activities and having intentional conversations around everyone’s answers are key steps to fully understanding “where you want to be” that can better inform the third step in the process: “how to get there.”