Farm Succession Planning: Agricultural Estates Navigate Fair and Equal

[Yeager] I'm not trying to start a fight, honest. I'm actually trying to prevent them. With today's topic on the MToM podcast, I'm Paul Yeager. This is a production of the Market to Market TV show. We know that people who watch the show are multigenerational. Some are on the farm, some are off, some have been there. And if you're watching, chances are you have interest in what's going to happen to whether it's the land, the buildings, the memories, the history, and you're trying to prevent it. Paying taxes let's be honest, that's really what a lot of this is. It boils down to financials for some people. What is your plan? Have you made an estate plan? Have you talked about succession? They are not one in the same. They are related. They're cousins and they need to be put together sooner rather than later. Who's leading the charge? You're going to be surprised what Mike Downey tells you today, because it is from a generation you wouldn't think is the one that's doing the leading. So Mike is back with us here on the MToM podcast. He is the manager of succession planning for Uncommon Farm, and we are going to talk about a lot of things when it comes to succession planning, estate planning, some scenarios. If you think I have talked about your specific scenario, that is purely a coincidence and not any exact story mentioned. Just get that disclaimer in there. New episodes come out each and every Tuesday. Let's get to our discussion with Mike. 

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[Yeager] Mike, it has been a while since we last chatted. Has this whole problem been fixed? Everybody has everything signed, sealed, delivered and communicated what they want on their wishes for their farm.

[Mike Downey] I wish I could say that for all, but I think you know my answer there. It's still an issue out there, I would say, if anything, it's been more of a limelight issue for folks, you know, even recently, I heard a political panel and economists that typically talk about different issues. But when they're asked about, you know, what do you see that could threaten family farms and agriculture? It's ironic how much you hear about, you know, secession and the industry.

[Yeager] Have we at least made progress on the issue?

[Downey] I'd like to say that, you know, certainly it's interesting what motivates progress. And people to do planning. And there's that old adage, there's two certainties in life, death and taxes. Right. But ironically, one motivates farmers to do some planning, more than the other. But I get it. You know, farming is a different, different animal to talk about. It's not just a job or an occupation. For many, it's a livelihood and identity. But I do think as we look at the demographics are trending continue one way. And that's, in general, farmers and landowners are probably the oldest we've seen in history. So I think more and more are getting it that we need to figure something out.

[Yeager] Let's go back to the beginning of that answer. Death and taxes. In this issue, the two are tied together. Let's start, then with your first answer, you mentioned politically any assistance coming from the government here right now, since we last chatted a couple of years ago on this issue.

[Downey] Yeah, I was just at our summer conference last week in Des Moines, and we had, some, some political folks there doing a panel, and obviously we did. We have the new, you know, big, beautiful bill, you know, so we were getting all updated on that. There are some new programs and funds out there to benefit beginning and young farmers. And so I think that certainly, even at those conversations at the political level, obviously is something that they've been talking about.

[Yeager] Do we get the sense that will, I won't say force the hand, but maybe open up discussions from an older generation to put something on paper. Now that maybe that basis has changed the step up in basis?

[Downey] Yeah. I mean, you know, that's a good question. I think I think, you know, I think probably more so than even that, Paul is, you know, there was going to be a tax sunset at the end of this year that did not come to fruition. All right. The state tax exemptions were actually made permanent. So ironically, I first was exposed as a session planning back in 2010 and 11 leading up to another significant tax event that was to occur in 2012. So I'm a little concerned that, since exemptions have been made permanent and the state tax concern quite isn't, isn't there anymore that maybe they'll prompt people that, we don't need to, you know, worry about this. We can worry about this later and so forth. But I just look at it, so the session means so many other things than just tax planning after death about transition. Now with day to day farms and getting that next gen involved.

[Yeager] I guess before I go negative, Mike, I'll just walk me through what a perfect succession plan looks like.

[Downey] That's ironically the question that I often asked. Folks that I'm meeting with is what is an ideal outcome look like for you? Because that could be different for everybody. But you know, our definition, definition that we like to use or offer is it's not just about a successful transfer transition of assets, but also, you know, kind of what our long term vision is, values, the business continuity, keeping the business together, the day to day leadership and management, put that all together along with a good estate plan because, you know, there's a distinction between estate planning and succession planning. Estate planning is just one component of that. But put that all together. You know, I think that's when you can create a legacy and something that you can pass along to the next generation.

[Yeager] Well, okay. So estate planning but yes, they're different. But the two have to kind of go together. Right. They're not, they're not mutually exclusive. They are bound together.

[Downey] I would say estate planning. I like to, you know, and I spent a lot of time on this, actually, it's a big one at the top of my list. As far as common, where the common traits of farms that do successfully transition on the top of the list is they know that there's a distinction between estate planning and succession. They truly focus on succession first, then the tax part of the estate planning. And so those that understand that difference, that estate is just kind of one component of that. But, you know, again, a lot of folks I meet with have an estate plan. I think they're in pretty good shape. But when I actually play that out, what is a perfect outcome for you? It's surprising how many times those two don't complement one another.

[Yeager] Why? Why is that?

[Downey] Again, I think as a general rule, our, industry, because of our tax law, is getting a step up in basis that promotes after death transfers. And sometimes folks just don't think through, okay, what's that going to look like for the next generation? And maybe there's some things that we should be transitioning today. That's an important part to keep the day to day operations going. And then the intangibles non asset pieces just training and educating the next gen on just how to continue to manage this farm moving forward.

[Yeager] And is there ever too early of a time to have that conversation?

[Downey] I know the, I guess the boilerplate answer to that or to cliche is you can never can start soon enough. But I just was asked that last week, their children are in high school, and, they're going to start that conversation on how they're going to communicate to their kids on what it looks like to come back to the farm, you know, do you need to go work a few years off the farm after school before you come back and bring some experiences back with you? Or can you just come back right away? After school compensation and decision making. All of these are things that, you know, you can't really start soon enough to communicate. So everybody kind of knows what they're planning for.

[Yeager] If there's someone with, a child in high school or children in high school, they might be in their 40s, let's say, if they have not, what would be the percentage of people do you think are willing to have that conversation when the the older generation is in their 40s and the younger generations in high school.

[Downey] I would say higher than you believe, because I'll go a generation ahead to the generation ahead of the 40s are in their 70s and 80s and 90s, you know, and, that generation, as a general rule, is maybe more, kept things to the chest, if you will. And, then communicate the best future plans. And because people are living longer and able to, enjoy what they do, farming longer, sometimes that delays that. And those folks in the 40 and 50 year generation, you know, are still working with their folks on the farm. And, and sometimes that impacts them and what they want to do with their kids, that they kind of do it the other way around, where they'll actually communicate more than maybe the generation before us did.

[Yeager] I wasn't trying to out them, but that's where I was going. That clearly can be someone north of 60 holds on and holds on. What? Have you seen that change at all in your time doing this, Mike?

[Downey] Yeah, one of my first families. I tell this story a lot. The call was from a 70 year old, and he was ready to do some planning. And that's pretty, you know, pretty normal. Pretty typical. But, in walking with him when we made that appointment was his father, 92 years old. Extreme example, but a true example. They were still, you know, in shares working together on the farm and, but really, by the end of that conversation, the 70 year old was more interested in how to get his kids in their 30s and 40s involved. So I think that's what you see. You know, one generation can impact the next on how they might communicate and handle things with the kids below them.

[Yeager] Let's keep the names out of it. Of course. But what's been the worst case scenario of someone who's maybe in their 80s and 90s that passes away before anything happens? What's the straight story that you've had to deal with?

[Downey] Probably could have a whole nother session on this, Paul. But, you know, I guess what scares me the most, I've mentioned this before is that when that estate plan plays out, does that really complement what they wanted to have done? And, if we, let time and appreciated farmland values and equipment values passes by, we've lost that opportunity to structure the way that it things to, you know, hopefully, give the farm the best position possible to continue forward. And but you'll be surprised how many times that isn't the case when assets are just equally divided among the heirs. And we have some farming heirs on the farm and off the farm. Heirs, or we're dividing up the family farm, can we continue to do that? Can we continue to have every farm pay for the same farm in every generation? And, you know, that's, I was just meeting with some folks yesterday that was very, you know, kind of on top of the list is we don't want to see our kids have to buy the farm again, just like we did from our sibling. And it really impacted our ability to grow and expand the operation.

[Yeager] Well, what's the percentage of people that have no plan? And they just whatever happens when they pass, it happens.

[Downey] If I go off the studies that have done, you know, even here in the state of Iowa, which I think would be similar across the country, is that I you know, I think, you know, only 30, 20 to 30% of farms actually have a written succession plan that they've sat down and really thought it out. And, you know, a lot of folks have wills and, you know, things that, you know, distribute assets, but truly not having a written plan, you know, to pass that farm to the next generation. So, again, an interesting phenomenon. I've often thought about Paul because I don't think I've ever met a farm, a farmer that's told me they don't want to see the farm, go to the next generation and stay in their family. But it's such a difficult subject for a lot of them to even talk about.

[Yeager] Well, yes, because it in our experience and having this discussion here, both you and me and other people, there is a reluctance for those trying to to how to best equally or equitably share on and off the farm. There's someone who has stayed behind to work on the farm, and there's those who have left the flock. In the rules you would think of most families, you're supposed to get the same thing from both of those in the eyes of the law. Right? And so what is the apprehension then, that some of those 80% or 70% who have not put anything down on paper, the reluctance to do something.

[Downey] Yeah, that fair and equal term, you know, it's you know, that is something that's up on the top of that list I mentioned before, of those that are doing it and experiencing success. They roll their sleeves up and they figure that out, instead of avoiding it like a lot of folks do. And, but I would say really understanding what your numbers are, especially with everything that's happened with, our farm values here in the last 10 or 15 years. But balancing that family harmony piece or that perceived discounted inheritance, if we apply discounts to family assets, balancing that versus how strong we feel that the farm is in a position to continue to be financially feasible, ability to continue the farm forward. And that looks different for every family, every situation. But, there's some give and take. You know, we're not going to probably get everything and everything perfect, but finding that balance that, there's, you know, everybody in the family feels like they've been treated fairly, but also in a way that the farm could continue forward.

[Yeager] Is it better when a family member who's that older generation makes that choice, or does it end up being better if the court makes the choice?

[Downey] Oh, absolutely. I mean, I think that older generation I mean, one of my favorite meetings is a meeting with the family where we just lay it out on the table to everybody right now, almost like a reading the will, where the kids can all hear it from Mom and dad or grandma and grandpa. An opportunity to ask questions and. But the folks that do that, the chances of having issues in the family later just significantly or, you know, reduced, as you can imagine. So, yeah, absolutely. We want to make sure that we control our own destiny and not put that into the court's hands.

[Yeager] I'm not really sure it's a study or if it's available for data for you to pull, but what has been a common, fair and equitable discussion about those who are on and off the farm and what they are, I won't say entitled to, but factored in in this discussion.

[Downey] Sure. You know, it's a lot different than splitting up an estate for, you know, someone that doesn't have a lot of farm assets. It's just a lot of liquid assets. It's pretty easy to split that up pretty equally. You know, that's a different discussion on the farm where a lot of the equity in net worth is in assets not necessarily liquid, you know cash assets. And so number one, making that distinction between, what those assets are on the farm that are important part for those that are continuing the farm forward that for them to control, just like mom and dad, if needed to use a building site or grain bins and equipment. It's probably best to transition those in the farm, on the farm active versus having that all split up between all the kids. So that's an excellent place to to start just thinking about your assets. And you know, what makes sense for family to share and versus those that maybe it doesn't so much.

[Yeager] And there are times though, when either there is still a note on that bin site or that building when something happens and a transition needs to be and something needs to be paid. Sometimes it's not all profit. There's debt that has to be settled to.

[Downey] There is. Yeah. You know, not everybody realizes that that, you know, debts or can be part of an estate plan too. And how are we going to handle that? And, maybe it's best, if we have some really good long term debt secured, to not pay that off from the liquidity from the estate and just, you know, have that carry forward to the next generation. But, yeah, I mean, that's an excellent point. You make the difference of inheriting cash. They're just pure cash, no debt versus inheriting farm assets. There might be some liabilities attached to it.

[Yeager] Which scenario is harder to navigate? Those the four that are off the farm or the two that stay on the farm, and two that have left the farm? 

[Downey] Yeah, I think it's, I mean, I've seen it go both ways, actually. You know, the whole, you know, talking about fair pay and sweat equity and, future inheritance and all these things. So I think it's just a matter of, really understanding what's going to happen because of our estate tax rules or things are going to get valued for its fair market value for estate tax purposes. But that isn't necessarily the way that we have to establish our family values. So almost having a process to value or a family market value, which oftentimes looks a lot different than the fair going rate, because as a general rule, families I work with don't expect those in the family don't want to keep this together to pay the same price a neighbor would have to, or somebody outside of the community. So, really getting our handles. I spent a lot of time on this. Understand your numbers. And, you know, that resonates for me. Well, for me too, because, you know, my dad and uncle farmed together for many years, and they had a corporation that was established for tax reasons, but, maybe not a whole lot of thought long term about the secession of the farm.

[Yeager] Well, and thank you for bringing that up, because that's actually the next thing I wanted to cover. So you have, it's easy when it's four kids. But what if it is. Yeah. It's your dad's brother or sister and then you have this your dad's kids, and they're the uncle and the niece, and they're. You start getting all this mix together, and it's not as clean and easy. What's a good way to try to navigate that?

[Downey] Yeah. If you have a plan that recalls maybe more standard or boilerplate, each generation gets involved. It gets a little bit more, removed from the farm and more chances if people want to exit. But I, that's where I have to really think about what is the process for folks to enter and exit each generation and really understanding what that equity looks like.

If there's gonna be folks buying, you know, sometimes, is it inevitable that we're going to be buying out other family members, siblings, cousins, extended, whatever the case is, but making sure we understand what those are and what that looks like, how it will impact the farm. So, having kind of that ebb and flow, if you will, for folks, usually where you don't have that and a good, clear process, that's where, the potential for conflict obviously can occur.

[Yeager] Well, let's, more my area growing up, we had families of 11 and 12 kids. And when you get 2 or 3 generations removed from that, and maybe there wasn't enough to spread out and split. But when you start having larger numbers, does that usually mean larger problems, or is that an easier discussion? Just because the math doesn't work? And instead of it being $100 or  $100,000, it's $100 because you have 15 brothers and sisters.

[Downey] I don't know if it necessarily is a numbers game, so forth as just, the personalities within that family and, and, you know, maybe what's been, communicated. And as they were raised on the farm and what their sentimental value is and, I don't know that I can really think of it just because we have more people in the family, that means we have a lot more conflict.

I think it's really more of a situation from one of the next and, you know, and obviously you throw in some, some in-laws and extended family and other folk, respected advisors or whatever that might be that, you know, that can also add to the mix, too.

[Yeager] Because there's going to be those that have taken more of a role in the executor of an estate, than maybe the other sibling. And the other kids are more involved. And so, yeah, it can get messy. I would, I would think.

[Downey] And I feel like even families I do get along at something that happens when mom and dad are here anymore. It's probably somebody in the family. Something is going to change. The flip's going to switch a bit, and at some point, someone is going to understand what their value of their inheritance is, and they're going to compare that to what their return is from their share, the income from the rent or the farm or whatever the case, you know, somebody is going to make that comparison at some point. So, being ahead of that, you know, so we again, it looks different for every family balancing that family harmony, what that inheritance looks like versus the financial feasibility for the farm to keep it going.

[Yeager] All right. We talk about the older generation. I wanna go back to the younger generation for a minute. If I could, if I'm somebody who fits into this puzzle some way, somehow, and I want to. And I don't see anything on paper or. No, if anything has been put on paper for either an estate or a succession plan, how do I best exhibit and communicate my desires, wishes for something to get done? Let's just say it's back to someone in their 20s?

[Downey] That's a question I get often. I don't know that I have a perfect answer, because I totally get it. Because sometimes if you're in that generation, you don't want to offend that generation ahead of you. You want to try to do it then respectfully. I mean, when you look at agriculture in general, we sort of have two generations. We have the one generation, mom and dad ahead of us that own all the equity and have all the cash flow and they know they need to do something. They're just not sure what to do. And then basically there's everybody else looking for opportunity, whether you're in your 20s or 40s or 50s for that matter. And they have, you know, not as much cash flow and equity. And they two know they need to do something that just not sure what. And but having some sort of common denominator to start that conversation sometimes that's the most difficult. Let's just get the conversation started, and then take it from there. So.

[Yeager] So if I'm the 25 year old who sees my uncle as a problem of not dealing with this, and my dad is not having that discussion and he's buried his head in the sand. I mean, how do I not get kicked out just wanting to have the conversation?

[Downey] Yeah. And I've seen also that there's been maybe some ultimatums given like, hey, you guys need to figure this out or I'm out. You know, that's one approach. I'm not saying that's the best approach. But I think, I think everybody can think of a situation in their neighborhood with neighbors in the community where it didn't go well. And but some whatever the push button is, it's sometimes this is a psychology game to what are those push buttons to help get someone started? Is it, you know, keeping the family farm going? Is it taxes, fear of taxes? Whatever the case may be, sometimes, those in the 20s getting married, Paul, have motivated mom and dad to do planning because. Oh, my kids just got married. We better do some planning now. I can go the other way around, too, where I've seen mom and Dad willingly want to pass the farm. And the kids understand that maybe there's some concerns with dad or the financial, being on the farm, and, like, mom and dad, you need to figure out how to get your financial house in order before we're even interested.

[Yeager] So, because I've seen it go south where a new in-law comes in, and then a divorce happens and there's not been a clean set up of that person's not entitled to, they can make a claim or I mean that that can be a factor, right? I mean, we're talking divorce. That's one thing. Then you have what if you have two farm families and those two houses are nowhere near in order or the same? Those are kind of, I'm guessing, dicey waters to navigate to.

[Downey] Oh, absolutely. Yeah. The financial piece is so important that, you know, you know, I get it. I grew up on a farm. I still help on a small family farm. I like to go out there and run the equipment, you know, work in the business. Not necessarily always on the business, but with everything at risk today, with family farms and the dollars changing hands and all of these risk factors, a lot of them that you talk about on your shows, you know, that's I think it's probably more and more important to stay on top of all those things and the not.

[Yeager] Mike, you've had conversations with people individually. You've also done larger sessions. What did you just do recently in Des Moines that you were trying to accomplish?

[Downey] Just had a one day in person, last week in Des Moines, full day workshop where I'm oftentimes I'll do, you know, maybe shorter 2 or 3 hour talks or part of another ag organization's, customer meeting. This is the opportunity for folks to come in and actually work on their own situation. And we maybe go through some examples, and then we hit the time out button. Hey, that's been 15 minutes. You and your family thinking about what we just talked about. And then, apply that to your own situation and, and sometimes the feedback we get is, is just, for us to get away from the farm, from our element, from all of our day to day distractions, to focus as a farm and a family on this is, you know, for some folks that's, valuable for them to do that, to get out of their element.

[Yeager] Nothing like a good hotel ballroom or an office park to take you off your game a little bit, for sure.

[Downey] You know, as you know, it doesn't hurt to offer some lunch and, yeah, some social piece of it, too. And, and I hear a lot of farms like to hear from other farms, you know, not just from session planners like myself, but, you know, bring in a panel of other farms and share their experiences and, you know, what advice they might leave everybody else to think about.

[Yeager] For that session, specifically the one last week, you were getting multiple people from a family to join, or was it just one person from that family? And you hope they had the conversation with someone else back on the farm?

[Downey] I think it's most impactful for multiple, for multiple generations to be there. Absolutely. I mean, we did have some that wasn't not everybody's able to make it. So maybe just one generation was represented or two, but, certainly having more there is very, I think, a lot more impactful than not.

[Yeager] Do you find that there was someone in those rooms reluctant to be there?

[Downey] Yeah. I mean, that's you know, this is a subject that's pretty, you know, sensitive, personal. Sometimes it takes some to warm up more than others. And, obviously you got to find that balance because I think when it comes right down to it, I feel like I thrive the best. Just one on one with the family sitting across the table. But sometimes offering just some good information for people to get their thought process started for their own situation. Hearing from others is helpful for them. But yeah, certainly, I think it's kind of a mixed approach for everybody. Everybody might prefer that a little differently. But, you know, as a general rule, farmers are maybe a little bit more private in nature.

[Yeager] What? What? What? Since when? I know all the loudmouth farmers. All of them. Not one wants to be reserved, quiet, not say anything about what's personally going on in their finances. That's all of them. Now, if only the case. Okay, Mike. So, if I've got, if I'm watching this, listening to this, whatever, and I know I need to have that conversation with my elder, where do I start?

[Downey] Well, I mean, you don't take for granted, you know, that your elder isn't aware that you want to have that conversation, because I've seen that happen to where, you know, elder can say, well, I didn't even know that was so important to them. You know, if they'd only just let us know. So I think really finding that opportunity for everybody has different personality and communication styles and push buttons, like I mentioned before, what those are to, like, just to make sure that they understand that you'd, like, love to have that conversation. And because that impacts, at the end of the day and the future of the farm and the planning for the next generation to help them do some planning when they know what, what the plan is for the generation ahead of them.

[Yeager] So and you can start with, I'm guessing, I want to, I want to carry out your wishes that elder has, has earned that. I would think.

[Downey] I would, yeah, for sure. And, you know, especially you see that with multi-generational assets and family farms at legacy in that heritage piece. You know, legacy doesn't have to be about always about a physical farm, the land itself, it can be about memories and, and, I that's one thing I really encourage folks, you know, actually, at the workshop last week, one of the exercises we did was sketch out the key events of your farm that have helped lead you to where you are today, because you'll be surprised. That's a very simple elementary exercise. But, you'll be surprised how many times that history isn't carried forward. And once that kind of gets lost in translation from one generation to the next, it's, you know, that potentially is lost forever.

[Yeager] What is my next opportunity to have a group session with you, Mike?

[Downey] Oh, if you want to, travel down to south of me, actually here, in a couple weeks, August 12th, I'm going to be doing a similar session down in Amarillo, Texas. We work with a group of farms down in the Panhandle. So, we're actually having a peer group of farms that we work with that are gathering down there. And I'm just coming down, a day ahead of that to offer this workshop, and. But we'll be offering others here, later this year and this winter. We have several in the works, some in collaboration with some other groups as well. And, so obviously, you can always, follow us on our website where we have all of those events posted.

[Yeager] And which website is that, again?

[Downey] Uncommonfarms.com. Yeah, that's, I played out the secession planning efforts. Uncommon farms is a farmer based organization that just works with farms across the country in North America, just on not just secession, that kind of a lot of these other areas we talked about today, Paul, the financial peace and the people and just helping farms kind of stay on track, whatever those goals are.

[Yeager] So I appreciate the time. Good to see you again, Mike. Thank you.

[Downey] Thank you Paul.

[Yeager] My thanks to Mike from Uncommon Farms. It's not uncommon to be in this situation. So go back. Share this one with someone that you want to have that discussion. Or go look for any of our past episodes. We'll talk to you next time. New episodes every Tuesday. If you have a comment, we'd love to hear what's on your mind or send me an email. markettomarket@iowapbs.org. See you next time.

Contact: paul.yeager@iowapbs.org