transition planning

Written by David L. Marrison, Professor & Field Specialist in Farm Management, OSU Extension

“I guess it comes down to a simple choice, really. Get busy living or get busy dying.” This famous line was quoted by Andy Dufresne, played by Tim Robbins, in the iconic movie titled “The Shawshank Redemption” released in 1994.

As we each traverse through our lives, we all are presented with moments that make us pause and reflect on how precious the time is we have been given here on earth. Every time I watch The Shawshank Redemption, I pause and think of the deeper message in this line:  that life can be spent going through the motions and waiting around for something to happen or you can make something happen.

As we look at developing a plan for transitioning the farm to the next generation, are we waiting around for something to happen? Or will we work to make something happen? As farmers, we have to contend with and solve the day-to-day problems which arise on the farm. And there is never a shortage of problems that arise. Because of this, the time for deeper planning functions such as farm transition planning is often pushed down the to-do list.  So, what will be the trigger to make something happen with regards to your succession plan?

What will be your trigger?

One of the hypothetical questions we pose in farm succession workshops is, “What knowledge would you need to pass on if you knew you had only two months to live?” This exact scenario happened to our family in 2010 when my father was diagnosed with pancreatic cancer just as we entered into Spring planting season on our dairy farm in northeast Ohio. 

My father valiantly battled this disease but passed away seven weeks later. Our family learned a lot and had to scramble to manage the farm in the midst of his illness. I am grateful for the short time we had with my dad to make preparations. But it was not long enough to learn everything we needed to know to run the farm without him.

I challenge you to think how your farm and family would react to the loss of the principal operator.  What knowledge and skills need to be transferred to the next generation so they can be successful without you? What can you do today to make something happen?

Who Will Manage the Farm in the Future?

As you develop your succession or transition plan, there are a myriad of decisions to be made. These decisions include identifying the next leader/manager of the farm, how to be fair to off-farm heirs without jeopardizing the future of the on-farm heirs, how to distribute assets through the estate plan, how and when the senior generation will retire, and how the business will deal with unexpected issues such as divorce, disability or paying for nursing home expenses. I would contend that the most crucial planning functions are to identify the next manager of the farm and then strategically plan how to develop them to lead the farm in the future.

The first step is to identify who the next leader or leaders of the farm will be. The next generation could be an immediate family member (son, daughter, grandchild) or extended family member (brother, sister, niece, nephew). With that said, the next leader does not have to be from your family as some farms have transitioned successfully to a non-blood friend or neighbor. The key is to choose a successor who will be the best caretaker of the farm and the land they will be entrusted with.

As you review potential managers and heirs to your farm, it is important to talk with them about their vision for the future and how it aligns with the current farming operation. What are their goals and aspirations for the farm? What concerns do they have about the future of the farm? 

Complete a skills assessment with each potential heir/manager to examine their current strengths and which areas they will need to receive training in order for them to be a better leader for the farm in the future. Talk with them to learn more about what they would be most concerned or scared about if they had to take over the farm today. Are there additional responsibilities they would like to assume and what is their expectation for an appropriate time for management control to be transferred?

The new manager should have experience with how other farms are operated. Having the future manager work on another farm prior to returning to the home farm is a valuable experience. Mentor relationships should also be developed for the new manager to have a trusted team to help them grow.

Putting the Transition into Motion

The transition can be accomplished gradually by turning over more responsibility and authority to the successor.  In fact, this process may (and should) take 5-10 years. It is important to develop a timeline for transferring ownership, management responsibilities, and knowledge from one generation to the next.

As the senior generation transitions their role and responsibilities to the next generation, thought should be given to the overall labor hours which will be available. In some cases, the responsibilities of two members of the senior generation will be transitioned to a single successor. Think of husband/wife combination transitioning to one of their children. This could cause a labor shortage. Could some tasks be outsourced to independent contractors (like accountants)? Can some production practices be accomplished through custom hire arrangements (silage harvest or cattle breeding)?

The biggest task in the transition plan is making sure the next generation has a firm foundation of knowledge to manage the operation in the future. This will look different for each farm and for the type of manager that is needed.

Owner-Operator. If the next manager is going to be an owner-operator, then training will need to include how to manage all aspects of the farm. These include production skills to raise livestock and/or crop enterprises and marketing skills to effectively market each commodity produced. The owner-operator will also need financial skills to manage the operation’s finances and taxes and human resource skills to manage employees. Additionally, they will need to know how to maintain facilities, tools, and equipment as well as how to manage risk through crop, livestock, and farm insurance.

Owner-Landlord. To the contrary, if the next manager will be more of an owner-landlord, they will need to be trained less on the day-to-day production activities and more on how to manage the farm asset. Some skills which are necessary for landlords include tenant and farm rental management, farm finance and tax management, farm insurance decision making, and facilities and other farm assets maintenance.

Strategies recommended for farm businesses to utilize in the transition process are:

• Every person who is part of the business (family member and employees) should have a written job description which includes job duties, responsibilities, and expectations.
• Create an organization chart of all employees and how each employee relates to one another.
• Develop a timeline for the successor to work through each job description on the farm. It is good to start the new family member as an employee and not the top manager.
• Provide meaningful opportunities for decision-making as well as accepting responsibility for the future manager.
• Develop a plan on how the future manager can increase their equity in the farm business through gifting, purchasing or inheritance.
• Develop a timeline for retirement and managerial transfer from senior generation to the succeeding generation.
• Utilize family business meetings to discuss the transfer and changing roles within the business.

Some experts advise that the current manager take a number of planned absences before retiring to provide an opportunity for the successor to see what it is like to manage the business alone. This will also allow the current manager to see that the farm does not fall apart without them. So how do you know if the next generation is ready?  There are two other approaches which you can use to help prepare the next generation to lead without you:  

Opossum Approach. Just as an opossum plays dead, so too should the principal operator.   Take an unannounced week away from the farm during one of the busiest times of the year for your farm and allow the junior generation to take over with no communication from the senior generation.  I know this sounds crazy but how else will you know what knowledge and skills need to be transferred?  It is a lot easier to come back after a short vacation and be able to answer the questions your son or daughter has.  You won’t have this opportunity when you pass away.

365-Day Challenge.  Outside of using the opossum approach, it should be the goal of the senior generation to transfer at least one knowledge point or skill to the next generation each day. So, by the end of the year, your heirs will have 365 new tools in their management toolbox. If you do this over the next five to ten years, you can teach your heirs an incredible amount.

Take Advantage of OSU Extension Workshops

Attend one of our “Planning for the Future of Your Farm” workshops this Winter to learn about the communication and legal strategies that provide solutions for dealing with farm transition needs and decision making.  A webinar version and several in-person options for the workshop are being offered.

Webinar version.  You and your family members can attend the workshop individually and online from the comfort of your homes. The four-part webinar series will be February 5, 12, 19, and 26, 2024, from 6:30 to 8:30 p.m. via Zoom. Pre-registration is required so that a packet of program materials can be mailed in advance to participating families. Electronic copies of the course materials will also be available to all participants. The registration fee is $75 per farm family.  Register by February 2, 2024 to receive course materials in time. Register on this page.

In-person workshops.  Our local Extension Educators are hosting in-person workshops at five regional locations across Ohio. Registration costs vary by location due to local sponsorships. 

• February 2, 2024 - Tiffin, Ohio - Register through this link.
• April 4, 2024 - Lebanon, Ohio - Register through this link.

More information about our Planning for the Future of Your Farm workshops is available at: go.osu.edu/farmsuccession.

Final Thoughts

So, are you ready “to make something happen” to transition your farm to the next generation?  Farm managers are encouraged to think about how the next generation can be prepared to lead the farm in the future.  And as Andy Dufresne stated in The Shawshank Redemption, “remember, hope is a good thing, maybe the best of things, and no good thing ever dies.”  Good luck as you plan for the future of your farm!

Questions from farmers and farmland owners about agricultural easements are on the rise at the Farm Office.  Why is that?  From what we’re hearing, the questions are driven by concerns about the loss of farmland to development as well as desires to keep farmland in the family for future generations.  An agricultural easement is a unique tool that can help a farmland owner and farming operation meet goals to protect farmland from development or transition that land to the next generation.  Here are answers to some of the questions we’ve been hearing.

What is an agricultural easement?  An agricultural easement is a voluntary legal agreement by a landowner to use land primarily for agricultural purposes and forfeit the right to develop the land for other purposes, either permanently or, less often, for a term of years.  In an agricultural easement, a landowner grants an easement “holder” the legal right to enforce the easement against a landowner or other party who attempts to convert the land to a non-agricultural use. A written legal instrument details and documents this agreement between a landowner and the easement “holder.”  The agricultural easement instrument must be recorded in the county land records, and the agricultural easement is binding on all future landowners for the duration of its term.

A state legislature must authorize the use of the agricultural easement instrument, and Ohio’s legislature did so in 1999.  At that time, the legislature adopted a detailed legal definition of “agricultural easement” in Ohio Revised Code 5301.67(C):

"Agricultural easement" means an incorporeal right or interest in land that is held for the public purpose of retaining the use of land predominantly in agriculture; that imposes any limitations on the use or development of the land that are appropriate at the time of creation of the easement to achieve that purpose; that is in the form of articles of dedication, easement, covenant, restriction, or condition; and that includes appropriate provisions for the holder to enter the property subject to the easement at reasonable times to ensure compliance with its provisions.

The legislature also required in Ohio Revised Code 5301.68 that a landowner may only grant an agricultural easement on land that qualifies for Ohio’s Current Agricultural Use Valuation (CAUV) program under Ohio Revised Code 5713.31.

Is an agricultural easement the same as a conservation easement?  No, not in Ohio, but they share the same legal concept of dedicating land to a particular use.  Ohio also allows a landowner to grant a conservation easement, which is a promise to retain land predominantly in its natural, scenic, open, or wooded condition and forfeit the right to develop the land for other purposes.  A conservation easement might allow agricultural land uses, and an agricultural easement might allow some conservation uses.  The terms used in federal law and some other states vary from Ohio, and include “agricultural conservation easement” or “agricultural land easement.”

Who can be a “holder” of an agricultural easement?  Ohio law answers this question in Ohio Revised Code 5301.68, which authorizes only these entities to enter into an agricultural easement with a landowner:

• The director of the Ohio Department of Agriculture;
• A municipal corporation, county, or township;
• A soil and water conservation district;
• A tax exempt charitable organization organized for the preservation of land areas for public outdoor recreation or education, or scenic enjoyment; the preservation of historically important land areas or structures; or the protection of natural environmental systems (generally referred to as a “land trust” or a “land conservancy.”)

What kinds of land uses would be inconsistent with keeping the land in agricultural use?  That depends on the terms in the written deed for the agricultural easement.  Activities that might violate the agreement to maintain the land as agricultural include subdivision of the property, commercial and industrial uses, major surface alterations, and oil and gas development.  It’s typical to identify the homestead or “building envelope” area and allow new buildings, construction and similar activities within that area, but those activities might not be permitted on other parts of the land.  Review the  Ohio Department of Agriculture’s current Deed of Agricultural Easement through the link on this page:  https://agri.ohio.gov/programs/farmland-preservation-office/landowners.

Can a landowner transfer land that is subject to an agricultural easement?  Yes.  An agricultural easement does not restrict the right to sell or gift land, but it does carry over to the new landowner.  That landowner must abide by the terms of the agricultural easement.

Are there financial incentives for entering into an agricultural easement?  Yes.  There are several financial incentives:

• The Ohio Department of Agriculture’s Office of Farmland Preservation oversees the Local Agricultural Easement Purchase Program, which provides Clean Ohio grant funds to certified local sponsors to purchase permanent agricultural easements in their communities.  It’s a competitive process that requires a landowner to work with an approved local sponsor to apply for the program and to donate at least 25% of the agricultural easement’s value if selected.  A landowner can receive up to 75% of the appraised value of the farm’s “development rights,” with a payment cap of $2,000 per acre and $500,000 per farm per application period.
• Federal funds are also available through the Natural Resource Conservation Service’s Agricultural Conservation Easement Program. This program is also competitive and requires a landowner to work with an approved partner to determine eligibility and apply for easement funding.  NRCS may contribute up to 50 percent of the fair market value of the agricultural land easement.
• There are also federal income tax incentives for donating a portion or all of an agricultural easement’s value to a qualified charitable organization.  Internal Revenue Code section 170(h) allows a landowner to deduct the value of the easement up to 50 percent of their adjusted gross income (AGI) in the year of the gift, with a 15-year carryover of excess value.  That AGI percentage increases to 100% for a “qualified farmer” who earns more than 50% of their gross income from farming.
• There can also be federal estate tax benefits for land subject to a permanent agricultural or conservation easement.  The land is valued at its restricted value, which lowers the estate value.  Additionally, Section 2055(f) of the Internal Revenue Code allows donations of qualifying easements to a public charity to be deducted from the taxable value of an estate.  Up to 40% of the value of land restricted by an agricultural or conservation easement  can be excluded from the value of an estate if the easement meets Internal Revenue Code section 2031(C) provisions, limited to $500,000. 

How can a family use an agricultural easement to enable farm transition goals?  Here’s an example.  John and Sue are fourth generation owners of 250 acres of farmland they plan to leave to their child Lee, and they want the land to remain as farmland into the future.  Lee is committed to farming and wants to farm, and John and Sue would like Lee to have more land to improve the viability of the farming operation. They find a local sponsor and apply to Ohio’s Local Agricultural Easement Purchase Program, offering to donate 25% of the agricultural easement value to the program.  They are selected for the funding and receive a payment of $2,000 per acre for the agricultural easement.  They use the $500,000 in easement proceeds to purchase additional farmland for Lee.  John and Sue receive a federal income tax credit for the portion of the easement value they donated to qualify for the program, and carryover the amount until it is fully used, up to 15 years.

What are the drawbacks of agricultural easements?  There are challenges and drawbacks of agricultural easements, and we’ll discuss those in our next blog post.

Agricultural easements require legal and tax advice and careful planning.  Our short Q&A doesn’t address all of the nuances of agricultural easements.  It’s a big decision, and one that should align with current goals and estate and transition plans.  To determine if an agricultural easement works for your situation, seek the advice and planning assistance of knowledgeable legal and tax professionals.

We're happy to announce our popular “Planning for the Future of Your Farm” webinar series for 2023.  The four-part online series will be on January 23 and 30 and February 6 and 13 from 6:30 to 8:00 p.m. This workshop will help farm families learn strategies and tools for transferring farm ownership, management, and assets to the next generation.

Workshop topics

Here's what the webinar will cover:

• Developing goals
• Planning for the transition of management
• Planning for the unexpected
• Communication and conflict management during farm transfer
• Legal tools and strategies
• Developing your team
• Getting your affairs in order
• Selecting an attorney

Workshop faculty

You and your family will learn from two of Ohio's top farm transition experts:

• Robert Moore, Attorney with our Agricultural & Resource Law Program. If you didn't already know, Robert was in private practice for 18 years before joining our program. He provided legal counsel to farmers and landowners across Ohio on business, farm transition, and estate planning. 
• David Marrison, OSU Extension Field Specialist in Farm Management. David has been with OSU Extension for 25 years and is nationally known for his teaching in farm succession. He has a unique ability to intertwine humor when speaking about the difficulties of passing the farm on to the next generation. 

Registration

Because of its virtual nature, you can invite your parents, children, and grandchildren to the webinar, regardless of where they live in Ohio or across the United States. The webinar offers an easy way to include all family members in learning about how to develop a plan for the future of your family farm. 

Families must pre-register for the workshop by January 16, 2023 at go.osu.edu/farmsuccession.  We appreciate the support of the Ohio Corn & Wheat Growers Association in sponsoring the workshop and helping us keep the cost at $75 per farm family. The registration includes one printed set of materials that we'll mail to a family member, and other members will have access to electronic copies of the materials.

In-person workshops planned also

Several of our OSU Extension county educators are also hosting day-long in-person versions of the workshop on these dates:

• December 15, 2022 in Auglaize County at The Palazzo in Botkins.  Find more information here.
• January 19, 2023 in Fairfield County at the Fairfield County Agricultural Center in Lancaster.  Find more information here.

Don't miss out

We hope you'll join us for this important series!  Even if you already have an estate plan or have begun one, this workshop should help you learn more and ensure that you're effectively addressing your goals for the future of your farm and farm family. 

For additional information David Marrison at marrison.2@osu.edu or 740-722-6073.

Farmland can be a family's most important asset, recognized for both its heritage and financial value.  Here's some proof:  over 1,900 "Century Farms" in Ohio have been in the same family for over 100 years. And 130 of those farms have been in the same family for over two centuries -- testaments to the importance of farmland to Ohio families.

But there are threats that can cause farmland to leave a family despite its value to family members. Long-term care costs, divorce, debt, co- ownership rights, poor estate planning -- these are situations that can put family farmland at risk. The good news is that legal strategies can counter these threats. 

In our new publication, Keeping Farmland in the Family, we offer five legal tools that can help keep farmland in a family:

• Agricultural or conservation easement
• Right of First Refusal
• Long-term lease
• Limited Liability Company
• Trust

These legal tools offer a range of protection for family farmland, allowing a family to use a highly restrictive strategy that protects land for many generations or a less restrictive approach that secures land only for a generation or two. Examples provided throughout the publication can help farm families see how different scenarios play out.  The guide does not intend to substitute for individual legal advice, but offers a family a starting point for discussion and decisionmaking with an agricultural attorney. 

Read Keeping Farmland in the Family here.  We were able to produce this publication with financial assistance from the National Agricultural Law Center and the USDA's National Agricultural Library.