Ranching and retirement: Succession planning becomes vital
The U.S. Department of Agriculture says nearly 10 percent of the nation's 93 million acres of agricultural land will change hands in the next couple of years. As the next generation of farmers and ranchers dives into their production agricultural careers, consideration must be also paid to retiring and aging producers.
According to the most recent U.S. Department of Agriculture Census of Agriculture, the average age of U.S. farmers and ranchers is 58.3 years old, up from 50.5 years old just 30 years ago. What's more, the USDA's Economic Research Service reports that 38 percent of non-operator landlords are retired farmers.
A running joke among many producers is they'll quit farming when their funeral date is set on the calendar. However, as many third-, fourth- and fifth-generation farms evolve with new leadership roles for the next generation, many aging producers are seeking to effectively retire and pass on the reins.
"Agriculture is in a transition phase right now, and because agricultural enterprises are so complex, we are seeing more farming families focus on succession planning," said Alan Hojer, legacy consultant for First Dakota National Bank's Keep Farmers Farming program.
Much emphasis is placed on strategies to get the next generation started and ways to keep things fair, but not necessarily equal, among on- and off-farm siblings, but there's much less talk about retirement planning for the aging producer.
What works? What doesn't? What is a recipe for success? And which pitfalls could lead to disaster? These are questions Hojer helps families answer in his role as a legacy consultant.
"As producers in their 50s and 60s begin considering retirement, they must figure out a way to generate cash flow," said Hojer. "Farming families often focus on ways they can enhance their children's lives and further develop the business enterprise. As the transition phase takes place, these folks also need to consider ways to generate passive income."
Hojer recommends farming families put the business in an LLC or general partnership, which allows business assets and income to flow through that entity. This also creates a path for ownership for the upcoming generation.
"You can't rent the land to yourself, but you can rent it to the LLC, which is a way to generate cash flow," said Hojer. "Because it's passive income, it won't interrupt social security, and it's not subject to self-employment tax."
Hojer says producers need to have a team of experts who can help them with succession planning projects. These professionals may include a financial advisor, accountant, attorney and even insurance agents to discuss things like long-term health care coverage for aging farmers and ranchers.
"Sitting down with a financial advisor can help the farming families realize the true income of the farm and if it can provide for another family while supporting the retiring producers," said Hojer. "These strategy meetings then lead to discussions on the long-term vision for the operation."
Once that vision is determined, communication plays a large role in success or failure of the transition.
"Whether it's keeping the entity whole or fragmenting the land to gift to the children equally, it all depends on the business and the priorities of the owners," said Hojer. "There's no one size fits all, and while fair isn't always equal, the folks I've seen who go into retirement in the best shape are ones who have a diversified portfolio. So often, my generation invested in things we knew about — cattle and land — but my best advice for the 20- to 30-year-old producers is to also tuck money into other investments to be better positioned for retirement."
Hojer, who raises Gelbvieh and Balancer cattle on his family-owned ranch near DeSmet, S.D., says his role as a legacy consultant has helped in his own operation.
"We work with farmers and ranchers across the state, and every agricultural family I visit with, I learn something from," he said. "What I'm doing professionally has absolutely been a huge asset to my family's business, as well, and the work we are doing is so valuable to the producers in our state as they move forward with the next generation."
To learn more about the Keep Farmers Farming program, check out www.firstdakota.com/agriculture/keep-farmers-farming.