As farmers age, planning for the future of their business grows
The "graying tsunami" in rural America means that more farmers are being forced to decide what happens to their farm once they retire or die.(Photo: Susan Montoya Bryan, AP)
WASHINGTON -- When Varel Bailey and his fellow shareholders meet this month, the seven-member family board that includes his three children will focus their attention on one issue: who should benefit from the financial success of the farm.
Bailey's parents first began giving shares annually in the Anita, Iowa, farm in 1966 and continued doling out stock equally to their three children during the next 40 years. While Bailey stayed on the farm and helped increase its value, his sisters left and now at least one of them wants to receive full value for her shares. But Bailey believes she didn't contribute to their appreciation and is entitled to one third of the value of the parents' estate at the time he joined the operation but not a third of its value today.
As the 73-year old crop and livestock operator prepares the 1,200-acre farm for the future, Bailey is working to determine the "fairness factor," as he calls it, to reward his son, Scot, who has worked with him since 1990 while at the same time fairly rewarding his two daughters who left the farm to embark on successful careers outside of rural America. Currently, each of his three children would receive a third of his shares.
"We're working on a deal and saying OK is there a way to calculate our son's contribution to the creation of wealth that his two sisters didn't participate in," said Bailey, who added that keeping most of the stock owned by people working on the farm is important for the long-term viability of the business. "Shares owned by distant relatives with little or no connection to the farm threaten the financial stability."
The "graying tsunami" in rural America means that more farmers are being forced to decide what happens to their farm once they retire or die. If they decide not to sell the business, the farmer must decide how to divide up the operation among the remaining relatives, many of whom are not farmers.
The process is further complicated because most farmers reinvest any profits back into the operation, leaving much of their personal wealth tied up in the business through equipment and increasingly valuable land. If one relative decides they want to sell his or her position, it can be difficult for the primary farm operator whose assets are tied up in the operation to get enough funding to buy them out, potentially threatening the financial health of the business.
As the number of U.S. farmers declines, the age of those still toiling in the field continues to climb. The U.S. Agriculture Department, for example, estimated in its 2007 census that the average age of the principal farm operators, the person in charge of day-to-day operations, was 57 years old compared to 54 a decade earlier. Across the country, about 230 million acres were controlled by a principal operator 65 years or older.
"With the aging of the farm population, and particularly with the rapid appreciation of land values and the assets, there certainly is a need to plan how those assets are going to be transferred and if you want the business to continue," said Ron Durst, a tax specialist at the USDA's Economic Research Service.
Most estate and succession planning is done privately with farmers working closely with accountants, lawyers or other individuals. As a result, there is no available data to show what percentage of farmers have already decided what will happen to their farming operations.
Julia Freedgood, managing director with the American Farmland Trust's Farmland and Communities Initiatives, said the group has focused on estate and farm succession planning for more than 20 years but refocused its efforts last year after finding that farmers were not doing enough to prepare.
Knowing that it can't help all farmers on its own, Freedgood said American Farmland Trust has published training materials and held classes with extension agents, attorneys, accountants and other groups who work closely with the agricultural community to get the word out. The initiatives have proven to be popular. One training program in New York and New England, which is currently underway for advisors that work with land owners and farmers, got requests from people outside of the region, including the Midwest. They were turned away.
"It seems like a lot of people aren't doing it, which is why we hear all these horror stories about families losing their farm because they didn't plan for it," said Freedgood. "As the farming population ages this problem is going to get worse. Even though it's an incredibly valuable asset, people don't just think about it that much."
The reasons some farmers avoid estate planning, experts say, include time, an ever-changing and complicated tax code and the reluctance to think about a future without them in it. Farmers received a small dose of certainty in January when Congress restored the exemption level of the estate tax to $5 million -- it had been in danger of falling to $1 million -- despite increasing the top tax rate to 40 percent from 35 percent. A $1 million threshold would have required a deceased person's estate to pay taxes on any inheritance above that level.
Scott VanderWal, president of the South Dakota Farm Bureau who farms with several family members near Volga, said ownership of land purchased by his grandfather in the 1940s was passed on to his father and uncle. Now, he said the challenge is to fairly distribute the assets to the six family members in his generation, and ultimately to the 19 children in the following generation.
"I think the attitude of the older generation was well, everything will work out, but when it gets to the point where there are so many people involved you have to take a proactive stance and actually do some planning," said VanderWal, who farms about 1,300 acres of land.
VanderWal said his dad and uncle are considering meeting with an estate planner or attorney later this year.
"It's like they say alcoholics need to first admit they have a problem. It's kind of the same way with estate planning. We kind of decide that we need some help and we need to get this done instead of just assuming it will all turn out," he said.
For some farmers, though, it's hard to plan for the future without knowing if the farm will even be there. Dave Miller, 61, a corn and soybean farmer with land in Lucas and Clarke counties in south central Iowa, said before he can do an estate plan he needs to figure out if the operation will continue to operate without him and who will oversee it. A few of his grandchildren have expressed an interest, he said, but it's too soon to know if they will be willing to take over the farm when they get older.
Miller, who sold family land in Indiana before buying his own land with his brother in 2003 as an investment, said he has no emotional ties to the land and is not sure how much longer he wants to continue farming.
"The question is, is there an ongoing business?" said Miller. "At the moment we're still in the early scoping out phase because we haven't identified anybody necessarily to continue the business."