If you think of “wills and trust” when you hear the word succession, you are not alone! However, you might not realize that your business’ governance document can also assist you in your business succession plan.

This section will talk about these three tools (wills, trusts, and business governance documents) in general terms to help you get familiar with how they might be helpful to your farm succession plan. We’ll cover the pros and cons of each approach and have included a worksheet at the end of the section to help you map out what options help you achieve your goals. Later sections in this guide will go into more detail on trusts and governance documents.

It is important to point out here that no matter the complexity or simplicity of your succession plan–you might want to transfer part of your business to family and another part to young farmers who are just getting started, or you might want to devise the land and equipment to one of your biological children– you must make a plan that considers your goals, values, and business assets.

No matter what plan you create, having one is better than not having one. Creating a legally compliant plan triggers the court system to uphold and protect that plan on your behalf! You have the power to direct the court system to enforce your plan. That’s some power to hold. So, let’s harness this power. Let’s get you to create a plan, write it down, and execute it through the appropriate legal documents!

To do this, you need first to understand the legal options. What kinds of legal documents assist in farm business succession? We will start with the basics–wills, trusts, and business governance documents.

Let's explore the basics

Wills- What Do They Do and How Might They be Helpful to a Farm Succession Plan?

A will is a written plan for distributing your things that others (of your choosing) will initiate and carry out after your death. Your things, or assets, can be distributed through a will– including land, money, investments, or a business. A will helps you gift your assets to whomever you choose after death. In the case of farm succession, you could ‘bequeath’ your business to someone, i.e., pass it to them through your will. If you aren’t the sole owner, you could also pass on whatever portion of the business you own at your death.

The biggest drawback to using your will to distribute your possessions at death is that the items must go through what is called probate. People often want to avoid probate because they consider it expensive and time-consuming. Furthermore, it is a public process, so anyone can access information on what assets were distributed.

  • Probate is the process of transferring assets distributed through a will. This happens in probate court, so that the court can determine if the will was legal This process on average takes 6-12 months, but can take longer for complicated situations, including business transfers.

Some states have a simplified procedure for smaller estates or exempt estates with very few assets from the probate process. You’ll have to check your state laws if you think these simplifications and exemptions might apply to the estate you are considering!

Furthermore, bequeathing your business via a will means the transfer will not happen in your lifetime. Without a transfer during your lifetime, you may not have as many opportunities to guide the incoming farmer on best management practices. This also means you won’t receive any financial return on the value you created with the business during your lifetime. For example, if you were counting on the business to contribute to your income in retirement (without working as a laborer), this is harder to achieve with a will. Furthermore, by itself, a will can only go so far in what it can dictate. Generally, it can only dictate who receives the item. It cannot dictate how that item is used after it is distributed. Trusts and easements could be used in conjunction with a will to achieve any goals related to the future use of the land.

That said, wills are common, relatively simple, and the most economical way to direct the distribution of your assets at your passing. However, this doesn’t translate to the majority of people executing wills. Only 1 in 3 Americans report having a will, with people of color less likely to have this estate planning document.

What happens if you don’t have, at minimum, a will for your assets, including your farm business? In the case of your farm business, there might be provisions in one’s governance document that control what happens to the farm business and its assets (like equipment), even in the absence of a will. However, without that fail-safe, one’s assets pass through intestacy if the retiring farmer hasn’t made a plan.

This means the state will decide how to divide your assets and will use its default rules to do so. Typically, in this case, assets will be passed equally between your heirs. The problem is that every time an asset is split, it becomes less valuable and manageable.  If you have two children, the operation might be split equally between your children. Will they be able to work together to manage the business and land? Some land and farms have been passed through many generations through intestacy, i.e., without a written plan. Eventually, the number of people owning a single asset grows, and the closeness with which they are related expands. Can you imagine trying to manage family land with distant cousins?

 Down the road, struggles with management can encourage owners to sell their portion or potentially force a sale of entire parcels of land.  Heir property, or property that passes automatically without specific designations in a will or by deed, has driven a lot of land loss over the last century, particularly in Black families.

These losses can be devastating. Wills are the first and easiest step in a succession plan. Of course, if you own farm property, it is more important to have a clear plan for who will access and control that land once you pass. It might make the most sense to devise it via a will, put it in a trust, or have a business entity own the land–every situation is different. Read on for more options so that you can determine which avenue is best for you. 

Trusts- What Do They Do and How Might They Be Helpful to a Farm Succession Plan?

A trust is a legal entity that can hold assets. There are a lot of different types of trusts. Some are effective once created, and others are created but don’t become effective until the creator’s death. Trusts are unique because no matter the trust chosen, the concept of ownership will be divided among two parties. Typically, we think of ownership as holding title to a thing, being able to manage that thing, and enjoying the use of the thing, right? Well, not in a trust! With a trust, two different entities take over each of those three ownership roles separately.

In this way, a trust is an entity used to hold your assets so that you can let another person, say an aspiring farmer, benefit from that asset without handing over complete ownership. They can use the equipment owned by the trust, farm the land owned by the trust, or spend the cash given to them by the trust. But the aspiring farmer wouldn’t outright own those assets.

As to the two entities involved in a trust, first, there is the trust itself, which is the legal ‘owner’ of the asset via the trust’s caretaker or trustee.  The deed for a property held in a trust will name the trustee as the owner. If a car is “in a trust,” then the car will be titled to that trust. If the asset is cash, the bank account will be transferred into the trustee’s name. The trustee holds legal title to any property in the trust and is tasked with managing the property without getting to use it. Secondly, there is the person (or people) who benefit from the assets in the trust, aptly called the beneficiaries.

Even though this sounds complicated, there are a lot of benefits to creating trust. For example, a trust avoids the process of probate.  Therefore, the contents of trusts aren’t public knowledge, and ownership can be immediately transferred when a specified event happens, like the owner’s death.

Trusts also give the current owner a measure of control over the future use of the things titled to the trust. The trust’s creator can develop detailed and precise instructions for distributing farm assets in the trust. The trustee’s administrative job is to follow those instructions and ensure the creator’s intentions are followed.

Of course, there are also drawbacks. Most importantly, there are several types of trusts, and if you are working with the wrong kind of trust for your goals, you might not get the benefits you are after. For example, if the trust is created to manage Medicaid eligibility, the retiring farmer must give up control of the assets in the trust to a trustee (and it becomes more like a gift). In legal terms, the trust cannot be revoked, called an irrevocable trust. Other trusts (revocable ones) will allow farmers to retain a measure of control over the assets in the trust until they pass but won’t help with Medicaid eligibility. See “Exploring Trusts to Achieve Farm Succession Goals” for more details on the various types of trusts.

Furthermore, creating a trust is more expensive up front and over time than simply creating a will. The trust needs a trustee; if decisions and control change, an attorney is usually necessary to do this work. Also, a trust has to be ‘funded,’ which means transferring the title of whatever things the creator wants in the trust. All too often, trusts are created, but assets aren’t transferred to the trust at all, or the transfer isn’t done correctly. In that case, the trust serves no purpose at all!

The process of ‘funding’ the trust with real property can also create tax issues that can be financially detrimental if specific steps aren’t taken. Many agricultural lands are enrolled in state programs that tax qualifying agricultural lands at values much lower than fair market value. These programs vary from state to state but, on the whole, save farmers a lot of money on taxes. Problems can arise, though, when land is transferred to its new owner–the trust.

Many states require that the county be notified within a certain number of days of transfer. Absent notification, the property can be kicked out of these tax programs, and the county may assess penalties. Not all states issue penalties, but they can be quite costly when they do. Some states require back taxes for several years to be paid when a property is unenrolled from the preferred tax program. Take care anytime agricultural land is transferred to avoid costly property tax mistakes!

Finally, trusts are also more expensive to form and administer because more people are involved for longer periods of time. Trusts add complexity to an estate plan; with that complexity, there is more room for error. Don’t let that deter you, though! You’ll succeed if you are clear on your goals and needs, do your research, and gather a good team of professionals around you.

Business Structures- What Do They Do and How Might They Be Helpful to a Farm Succession Plan?

Business structures are entities that give legal form and standing to a business. They can be informal (nothing is filed with the state), like with a sole proprietorship or a partnership, or they can be a formal business structure. Formal business structures include limited liability companies or corporations. Note that corporations can be organized as a C-corp, S-corp, nonprofit, or cooperative.

Generally, a sole proprietorship would dissolve once the owner dies. In all other business entities, what happens to the business when an owner passes is determined by that business’ governance document if such a document exists. If a governance document does not exist, state law will control.

Hopefully, Your farm business has some sort of ‘governance document’ or written rules about running the company. If you work with a business partner but haven’t filed with the state to have a business entity, you might have a partnership agreement. However, sole proprietorships and single-member LLCs might not have written anything down because just one person is making all the decisions!

Whatever situation a farm business is in, once it begins to contemplate succession, a good starting place is with whatever governance documents (or verbal agreements if there are no documents) they already have. In a single-member LLC or a sole proprietorship with no written governance document, the basis of the governance document will simply be the conventions and business routines the business owner has developed over time. Writing those down will get you on your way to a governance document.

Why is that? A governance document is simply a document that lays out how to run a business. Typically, they cover how a person enters the business, define a plan for how someone would exit the business, determine who has decision-making authority, and determine how and when to distribute profits. It’s easy to see how vital these decisions are to your business, right? If you need help developing a governance document, please check out our Farmers’ Guide to Business Structures. This guide will only focus on the portion of succession-related governance documents.

 Suppose your business entity is a Limited Liability Company (LLC). In that case, this governance document is called an Operating Agreement, and, depending on your state, it may or may not be required. They are always recommended, whether required by your state’s law or not! If your business is a corporation, non-profit, or cooperative, your governance document will be called Bylaws and, in these cases, is a required formality. No matter the terminology, these documents serve the same purposes.

The key parts of a governance document that impact questions of legacy or succession are the ones that discuss how owners of the business exit, if needed, and how new owners are brought into the fold. Often, these will be called a ‘buy-sell’ agreement. These sections cover what situations would give rise to a ‘buy-sell’ event. Governance documents should address at least what to do in case of death, divorce, disability, or voluntary sales.

In this way, a thorough governance document will force the owner to think about what happens in an emergency (the owner gets gravely injured or potentially dies unexpectedly) or in more welcome situations–when a younger farmer expresses interest and promise in joining (and potentially taking over one day) the business, or a suitable business partner appears and wants to buy-in to the business.

All of these situations contemplate succession from different angles–what happens to my business when I am gone, unable to work, or want to retire? This guide will discuss the structure of a typical buy-sell agreement and also delve into what types of clauses and plans can be added to a governance document to help structure an intentional succession plan.

Writing Instrument Needed Ahead: For the next exercise, you will need a pen and paper or a blank word document.

Try this: Which One Fits Your Goals (Wills, Trusts, Governance Document?). ~20 minutes

Which of these are you most concerned about in regard to your succession plan? Check all that apply.

  • unchecked I am not as worried about controlling how my farm is used after I die, but I do want to control who controls it after I die.
  • unchecked I really want to be able to sell my business to fund my retirement.
  • unchecked I want to gift my business to my chosen successor.
  • unchecked I am very concerned about the cost and amount of time it takes for assets to get through the probate process.
  • uncheckedI want to do everything I can to make sure certain farming practices are followed on the farm after I pass.
  • unchecked I want to donate my land to an individual or organization to meet my social justice goals.
  • unchecked I want to start bringing my successor into ownership right now to teach her the ropes.
  • unchecked When I die, I want to ensure that the business’s control and management go right to my chosen successor.
  • unchecked I am concerned about the cost of setting up expensive legal structures right now.
  • unchecked I am mostly concerned about paying for long-term care and want to be able to qualify for Medicaid.

Did you lean toward these as concerns of yours? 

  • unchecked I am not as worried about controlling how my farm is used after I die, but I do want to control who controls it after I die.
  • unchecked I want to gift my business to my chosen successor.
  • unchecked I want to donate my land to an individual or organization to meet my social justice goals.
  • unchecked I am concerned about the cost of setting up expensive legal structures right now.

A will is the primary tool to help you achieve these goals or alleviate these concerns. This does not mean other succession tools won’t work for you; consider all your options and work with trusted professionals!

Did you lean toward these as concerns of yours? 

  • unchecked I am very concerned about the cost and amount of time it takes for assets to get through the probate process.
  • unchecked I want to do everything I can to make sure certain farming practices are followed on the farm after I pass.
  • unchecked When I die, I want to ensure that the business’s control and management go right to my chosen successor.
  • unchecked I want to gift my business to my chosen successor.
  • unchecked I am mostly concerned about paying for long-term care and want to be able to qualify for Medicaid.

A trust is the primary legal tool to help you achieve these goals.  This does not mean other succession tools won’t work for you; consider all your options and work with trusted professionals! Also, remember there are many types of trusts, and not all will help you achieve these goals. Read the next section of this guide to learn more about various kinds of trusts.

Did you lean toward these as concerns of yours? 

  • unchecked I really want to be able to sell my business to fund my retirement.
  • unchecked I want to start bringing my successor into ownership right now to teach her the ropes.
  • unchecked I really want to be able to sell my business to fund my retirement.
  • unchecked I want to gift my business to my chosen successor.
  • unchecked I am very concerned about the cost and amount of time it takes for assets to get through the probate process.
  • unchecked When I die, I want to ensure that the business’s control and management go right to my chosen successor.

A business entity is the primary legal tool to help you achieve these goals.  This does not mean other succession tools won’t work for you; consider all your options and work with trusted professionals! 

What legal vehicle is standing out to you as most likely to help you reach your goals? How does that sit with you? Is it similar to what you thought it would be? Has this process surprised you in any way?

Tips for Moving Forward

What are your next Action Steps? Here is a partial list of action items to consider; add your action steps at the end. 

  • Read the next section of the guide to figure out which trust works best for my situation.
  • Talk with my attorney about the pros and cons of the succession tools I am leaning towards most.
  • Have conversations with my business co-owners about how I would like to move forward on my succession plan.
  • Re-examine what resources I have available for my retirement and long-term care costs.

Any other action steps come to mind? Take some time to jot them down.