The beginning of a new year is a great time to think about estate and succession planning for your farm or business. Here we consider 12 common mistakes we encounter in this area and why they matter.
Procrastinating
The most common estate and succession planning mistake is failing to plan at all. It’s an easy topic to avoid—after all, who wants to think about death or disability? But failing to plan limits your options and leaves your family without guidance.Planning for retirement, death, disability, or disaster will ease difficult transitions and ensure that your wishes are considered. Information and education are key to smooth transitions. Once you get started, the process is usually far less overwhelming than expected.
Thinking Planning is a One-Time Task
A related mistake is creating a plan and failing to regularly review it. A 20-year-old estate and succession plan is going to have holes. In some cases, it may be worse than no plan at all. Circumstances change, laws change, family members change, and goals change. Your estate and succession plan must adapt to these changes. It is important to remember that modifying an existing plan is usually much easier than creating one in the first place. Scheduling regular meetings with your advisors can keep you on track.
Planning without Family
The best plans involve discussions with family members, both with those who farm and with those who don’t. It is your plan, and your goals drive the process. But spending time listening to the needs, concerns, and desires of family members impacted by the plan will only make it better. A good communication plan can also help minimize conflict among family members down the road.
Giving it all “Share and Share Alike”
While most people desire to treat their children equitably, determining what that means is a key part of the planning process. For example, creating a plan where you give everything to four children, share and share alike, can create many problems after you’re gone. When family members don’t agree about how to manage jointly held assets, they may sue the other owners, seeking partition, and a court may divide or sell the property. It is best to consider the long-term future of assets and not just leave the details for the next generation to sort out. Sorting out these details can strain family relationships and, in some cases, lead to estrangement. Gifting separate property to individual family members can reduce the opportunity for conflict. Entities, such as LLCs, can allow family members to own property together without the risk of partition. The operating agreement establishes the rules for making decisions or for dissolving the entity.
Failing to Update Beneficiary Designations
Property such as life insurance or retirement accounts pass automatically at death to the person or people designated as beneficiaries. If that beneficiary dies and there is no contingent beneficiary listed, the account is treated as though there was no beneficiary listed. The property is brought into the probate estate, and it is distributed according to the will or the intestacy rules. This is usually not the desired result. It can also create administrative burdens and extra fees and taxes. The way to avoid this problem is to update beneficiary designations when life events such as death or a birth or divorce occur. It is also best practice to set up contingent beneficiaries as a safeguard.
Leaving Property Out of a Trust
Many people set up revocable living trusts with the goal of simplifying the administration of their assets at death. Property owned by such a trust at death will not go through the probate process, but it will pass according to the terms of the trust. A common mistake people make is failing to transfer their assets into the trust. While some property such as a titled vehicle may be intentionally left out of the trust, the trust only serves its purpose if all property is owned by the trust. A probate estate must be opened, for example, if a parcel of land is not transferred to the trust. Make sure to work with an attorney who oversees the re-titling process, and don’t forget to purchase new property in the name of the trust.
Assuming Everyone Needs a Trust or Entity
Although trusts and entities can be useful tools for estate and succession planning, not every estate plan needs them. Trusts, for example, will cost more to set up than a will alone, and they must still be administered at death. The administration just doesn’t involve a court. Candid conversations with advisors regarding your estate and succession planning goals will help determine the legal tools that will best meet your needs. Don’t be afraid to ask, “Why is this the best tool for me?”
Misunderstanding the Tax Consequences
All property transfers have a tax consequence. Some are favorable, others are not. Taking property out of a corporation, for example, is treated under the tax rules as selling the property. In other words, you will owe income tax on the transaction. Selling machinery over a period of 10 years may sound like a good way to spread out taxable income, but it will usually cause all taxes to be due in year one. Tax considerations are an important part of any estate and succession plan. Failing to seek expert counsel to understand the consequences before you act can be a costly mistake.
Failing to Plan for Disability or Retirement
Sometimes “tax planning” can get the best of us. Some self-employed people make every effort to avoid paying self-employment tax while they are working. While no one should pay more tax than they need to, if you don’t pay self-employment tax, you will not qualify for social security benefits at retirement. Similarly, there will be no survivor benefits for your family if you die early, or disability insurance benefits if you are suddenly unable to work. Retirement planning is an important part of any succession plan, even if we plan to work until we die.
Doing it Yourself
While YouTube has equipped us to try many things on our own, creating an estate and succession plan is not a DIY project. One small mistake can blow everything up. Assembling a team of skilled advisors is the best way to ensure you reach your goals. Teams often include a lawyer, a tax professional, an insurance agent, a farm transition planner, and/or a financial planning advisor. Rather than complicating the planning process, assembling the right team can help ensure a simpler, smoother transition. Upfront fees are almost always less than fees charged to fix a mistake.
Believing that All Experts are Equal
If you have a farm, it is important to work with experts, such as attorneys and tax professionals, who understand the intricacies of farm succession planning. It is worth driving a bit further or paying a little extra to work with a professional who understands your situation and can help you achieve your goals. Do some research before contacting a potential consultant. Word of mouth is often a good way to connect with skilled professionals who understand the unique needs of farmers.
Leaving it All to the Experts
Although we need experts to create and execute a plan, it is your wishes and goals that matter. Learning as much as you can about what’s possible can help you create the best plan possible. We created the Estate and Succession Planning for the Farm workbook to prepare farmers and rural landowners to meet with their advisors. You can order a paper copy for $15 or download it for free through the ISU Extension Store.
For those preferring more detailed education, our new Estate and Succession Planning for the Farm portal offers extensive teaching videos, case studies, and downloadable tools created by attorneys, tax professionals, a professional mediator and farm business management specialists. Subscribers receive lifetime access to the materials, which will be updated as changes arise.
The Beginning Farmer Center's annual Farm Transitions Conference, February 5-6 at the Courtyard by Marriott in Ankeny, provides another opportunity for learning. This conference offers two full days of targeted education for farm families and landowners who are seeking information on how to transition their farm to the next generation. Whether you’re just beginning to think about succession or are nearing retirement, the conference offers practical guidance from experts for each stage of your journey.
Estate and succession planning is rarely simple, but most common mistakes are avoidable. With thoughtful preparation, open communication, and the right guidance, families can protect both their operations and the relationships that matter most.