Think of your estate as a crop, and manage it for the maximum yield

As farmers, we are careful to plant our crops at the right time, in proper fertility and properly prepared soil. We know the right techniques for growing a good crop, and we implement them religiously. We’d never dream of sowing our seeds randomly, at the wrong time of the year, and expecting a good yield.

But for some reason, when it comes to estate planning, we throw out the good sense that goes into our farming. So let’s think about your estate as a crop. The seeds are your assets — typically land, houses, investments, cash, machinery, irrigation systems and the like. You’d like for those “seeds” to grow a good crop — perhaps a strong ongoing operation, but certainly an inheritance that enables your heirs to build on what you’ve accomplished.

Chances are, you’ve accomplished quite a bit. Farmers have enjoyed years of strong profits, enabling them to operate with low debt (at very low interest rates), while selling into markets buttressed by strong international demand. Even the horrendous drought of 2012 did little to derail the success of the well-run farm. And as I’ve discussed many times, the strong growth in farmland prices has significantly improved the typical farm’s balance sheet.

But now, a lot of farmers are approaching the harvest when it comes to their estates. It’s no secret that many farmers are at or past the traditional retirement age, and not all of their financial “fields” are fertilized and planted in a way that ensures a productive crop. Fortunately, for most, there’s still time to get things in order.

A good bit has been written lately about succession planning, and that’s a big part of the picture. So is reinvestment of profits into improvements that make the farm more efficient — and more valuable as an asset.

And, of course, there is the matter of taxes. Just a few months ago, impending changes in the estate tax threw a scare into farmers throughout the United States. You may recall that in the event of the farmer’s death, the tax burden could have been so great that families would have to sell the farm just to pay Uncle Sam. Thankfully, those changes didn’t go into effect as feared. But many farm owners found it necessary to sell in late 2012 to avoid such a nightmare. Better planning and management would have helped many of these avoid a potential crisis.

Two mistakes are especially destructive: Ignoring the problem and looking for easy answers.

To be fair, I should point out that burying your head in the sand is a superb way to solve one problem — the stress of actually dealing with a situation or making a decision. But at what cost? When you decide to just coast along, you’re stacking the odds dramatically against yourself and your heirs. You’re risking everything on the chance that the nation’s tax laws, farmland markets, farm policy, interest rates and other factors will magically fall into alignment to fit your current structure.

Looking for easy answers isn’t a lot better. There’s no single strategy that fits everybody. In one situation, it might make sense to sell the farmland and lease it back. Another farmer might benefit from buying the land he’s farming. Organizing the land under one or more LLCs or other structures might be a smart move for one, but not for another. In most cases, the farmer will need to consider a number of factors, such as location, land quality, balance sheet and the number (and interests) of heirs.

The farmer will also want to consider his legacy. In some cases, a charitable trust might actually benefit the heirs while enabling the farmer to do a great deal of good.

So why do so many land owners procrastinate on succession and estate planning? I think there are three  reasons:

It’s complicated. Most of us have learned that it’s better to know what we need to do before we act. That’s a good thing, as long as we don’t get stuck. But the best response is to get more information. Talk to a Certified Public Accountant, financial planner and/or tax attorney. Identify the options and begin simplifying them to see what the possibilities are for your situation. Become an expert on your own estate!

It’s emotionally draining. None of us wants to think about the family business without ourselves in the picture. We don’t want to make hard decisions about which child gets what. But it’s irresponsible not to do so. The only right thing to do for our heirs is to step up to the plate. Talk to the kids, the tax lawyer, and the accountant. The cost of failure to do so is higher than you can comprehend. I’ve been involved in the sale of farms where members of the family were feuding among themselves, and believe me, nothing is worse for business than this!

It calls for communication. Communication about financial matters is hard work. It can be uncomfortable, because it combines all the things we hate to talk about — the eventual loss of a family member, money, and relationships. But you are doing things that have a major impact on the future of others, and it’s always a better practice to involve them as much possible. If nothing else, this allows the heirs to do a better job planning their own estates. Will they inherit land or other assets? Will it be a lump sum or gifts over a period of time? Will the land go into a trust? What will be their share? All of this calls for open communication among the family members.

Harvest time is approaching. Are you ready?