A well thought out formal plan for transferring the ownership of a family farm sets out how you will do it on your terms. However, what happens in the case of premature death or a severe disability that incapacitates you and you are no longer capable of making decisions? Premature death or a permanent disability can derail your plans for an orderly transition of your farm. If this happens, do you have a contingency plan in place that will ensure the people you care about most will be looked after? Death or permanent disability while running a business, if it is not planned for, can quickly destroy it. This event can leave your family in a position where they have to wrestle with many personal and business issues with little or no guidance if there is no plan.
The first step in developing a contingency plan is to provide written instructions to your family as to what should happen if you are unable to be active in your farm business. Who should run the farm? Whether the farm should be sold and, if so, who the purchaser(s) may be? Who are the key advisors the family should turn to in order to assist with the transition of the farm and other estate matters? You need to provide your contingency plan to your key advisors to keep them apprised and solicit their feedback. Normally the farm is the most important asset of farm owners. Its protection is likely key to ensuring the family will be looked after.
What are the risks to the farm operation if there is no contingency plan? If you are no longer on the scene, the farm’s lenders may get nervous and restrict access to new loans or even demand repayment of existing loans. If you have a contingency plan, it will go a long way in giving your lenders comfort that their asset is not at risk. If no one is given the authority to make decisions, confusion could possibly rule the day leading to managerial mistakes and key people leaving. Family members may start pursuing their own agenda which will likely not be in the best interest of the long term viability of the farm business. The farm needs to be able to respond quickly. This will be difficult if there is no contingency plan.
One big risk arising from the premature death or disability of the farm owner could be the loss of knowledge and skills critical to the farm’s success. This is one very important reason why you should be working towards making yourself expendable. A number of farm owners do not like this concept, but it can be essential if you are going to have a sustainable farm operation. You need to be transitioning knowledge on a regular basis and making sure that your farm business has access to the skills you bring to the table if you are not there. Document what you do and how you do it. Train and educate family members and/or employees so they can step into your shoes. Not only will this facilitate your exit from the farm business, but it will also make life easier for you while you are active in the farm.
Insurance can play many roles in any contingency plan. Life and disability Insurance can be used to ensure the family’s financial needs are looked after in the case of your premature death or permanent disability. Key man insurance can be purchased on the life of the owner that would pay a death benefit to the farm. This money can be used to provide breathing space to allow the operation to adapt to new management or sell the farm, provide extra funds to pay bonuses to key people to encourage them to stay, etc. If you have partners or other shareholders, insurance can provide funds to purchase the interest of a deceased shareholder/partner leading to a much less stressful transition of ownership. If this purchase is not funded, the family may be left waiting for the money possibly leading to financial hardship.
Preparing a contingency plan detailing what should happen if you are not there should be a key component in developing a plan to exit your farm business. Planning brings clarity, gives you more control over your future, enhances the chances that you will achieve your business and personal goals, and reduces anxiety for the people you care about most.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
