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Navigating succession on the modern farm

Great transfer of wealth coming in the next 15 years
Mike Downey was the featured speaker at a farm transfer workshop hosted by Practical Farmers of Iowa (PFI) at the Johnson County Conservation Education Center, at F.W. Kent Park, near Oxford.

OXFORD– Seventy percent of family farms will change hands in one form or another over the next 15 years.
Those landowners are closing in on retirement age, but the majority don’t have a farm succession plan.
That’s a problem for rural Iowa, according to accredited land consultant Mike Downey.
Downey was the featured speaker at a farm transfer workshop, hosted by Practical Farmers of Iowa (PFI), at the Johnson County Conservation Education Center at F.W. Kent Park near Oxford.
Downey, a certified farm succession coordinator with Next Gen Ag Advocates in Mount Vernon, spent three hours helping a roomful of area residents learn about their options.
The pending massive transition of farmland expected to take place in Iowa and the Midwest is considered a pressing issue, noted PFI farm transfer coordinator Jorgen Rose.
PFI currently sees alarming trends toward consolidation and a lack of diversity in the farming world, Rose said.
“As landowners and farmers, you all have the ability to decide right now what you want for your land, what you want for your businesses,” he said. “Just clarify your vision of how you want your legacy to look.”
Downey outlined the massive scale of the coming change and its possible impact on small towns across Iowa, but also offered advice and choices to consider.
The demand for farmland has stayed strong, he said. The Midwest continues to offer the best farm ground in the world and prices continue to climb.
But the market can be artificially inflated by non-farm investors, he added, making it difficult for new farmers to purchase land.
“Who’s going to own and operate our farmland in the next generation?” he asked. Across the United States, he explained, 31 million acres are owned by foreign investors. Over a third of ag ground is owned by those with no farm experience.
At an auction last spring, 1,000 rental acres in southern Iowa received 47 bids from five different states, Downey reported. One of the winning bids came from 85 miles away. It was probably a capable producer, he said, but there’s an impact of consolidation on rural Iowa.
That producer is less apt to buy seed or bank locally, and the effects trickle down to area schools and businesses.
Much of the agricultural industry is controlled by only a few large companies, he said, and the same consolidation is now happening on the ground in Iowa.
“This is a trend we’re not going to stop, it’s just inevitable, it’s going to happen,” Downey observed. “We’re just trying to promote to folks that there’s options out there to do this responsibly. Do we really need to go 85 miles away to find a qualified producer?”
There are about 31.5 million acres of farm ground in Iowa, he said. Using Iowa State University’s (ISU) average price of $7,264 per acre, that land is valued at $228 billion.
The issue is the age group that owns this land, he noted.
Thirty-five percent is owned by those 75 years or older.
Some are estimating it will be the largest transfer of wealth the country has ever seen, Downey said.
Farmers a few generations back weren’t forced to subsidize the purchase of farmland or use off-farm income to supplement the operation, he explained.
New farmers seeking to purchase a farm and have it cash flow on its own merit will probably have to bring 50-60 percent to the table as cash for a down payment.
The farm succession decisions made by today’s landowners will have a big impact on the next generation of farmers.

There are two general ways it can happen– either the land will be transferred to family members, or to non-relatives. Each has its own dynamics and strategies, and each requires careful consideration and planning, Downey suggested.
Much of the reason for the creation of Next Gen Ag Advocates was to assist with transfers between non-related parties, he said. Sixty-eight percent of farmers do not have children who farm and over half have not identified a successor.
Next Gen Ag offers a Century Match Program, helping retiring farmers plan for their exit.
“It’s hard to just pull the plug from 40 years of farming,” Downey observed.
The program matches the landowner with a producer and Next Gen stays involved for several years as a third party to increase the chances of the arranged marriage working, he said.
“The fact of the matter is a lot of our retiring farmers are going to turn into land owners,” he said. “We have this bigger pool of land owners now to match up with a smaller pool of producers. For every farmer under the age of 35, there are six that are over the age of 65.”
Next Gen Ag also has a mentoring program through which a young, aspiring farmer is matched with a tutor to farm up to 500 acres using the mentor’s equipment in exchange for labor, he added.
PFI and ISU also offer programs to match landowners with producers, Downey noted.
Since purchasing land can be difficult for beginning farmers, leases are common, but they also can contribute to consolidation in the industry, he said.
Over half of Iowa farms are rented, he said. In some counties perhaps up to 70 percent.
But when the lease is put up for auction, higher prices favor the larger producer and not the beginner.
“The most common method of establishing cash rent is to set a rate similar to what other people are charging in the area,” Downey noted, citing an ISU publication.
That market approach continues to drive up lease rates, and companies funded by venture capitalists are now offering three years rent up front at rates that wouldn’t work once you ran through the numbers.
A crop share lease is still a viable option, Downey said. Landowners can receive a 15 percent state of Iowa income tax credit entering into a crop share agreement with a beginning farmer (a cash rent lease nets a five percent credit), he noted, but Next Gen favors a flexible cash flow lease that establishes a base rental rate and then allows the tenant to share a third of profits once profitability is reached.
Downey said he’s seeing a disconnect between farm profit margins and what people are increasingly willing to pay for ground. That has extended to farm leasing, he noted, where market pricing squeezes the margin at the cost of some preferred practices.
“Farm land leasing trends do not correlate well at all with increased focus on conservation,” he stated.
Landowners care about making a profit on land but are also concerned about stewardship of the land.
With a flexible lease based on average yields and costs, he suggested, landowners forego some upfront money while providing producers with reimbursement for time and labor to build in some profit.
It’s a sustainable structure that helps manage risk and changes the relationship between tenants and landlords, he said.
“We’re trying to promote a new way to modernize the industry,” Downey explained. “With all the information available to us, there’s no reason we can’t establish what’s fair up front.”

When it comes to transferring a farm to family members, it’s even more important to have a plan and communicate it, he told workshop participants.
Downey said he’s not a big fan of simply leaving the farm to a surviving spouse.
Kicking the can down the road can put a lot of pressure on the surviving spouse, which could lead to a rash decision.
There are also other dynamics at play, especially when it comes to children and the division of assets, he said.
Next Gen starts the process by helping to determine the goals of the landowners, but there can be differences of opinions even between spouses.
Are they more worried about discounting their children’s inheritance or providing an opportunity for one of the children to buy out another?
The answers have a big impact on how the transfer is structured.
Who should own the operating assets and who should own the land?
When should the transfer take place? At death or before?
One farmer left his equipment to all eight of his children but only a couple farmed, Downey reported. Another spent 20 years buying out an uncle, and another 20 years buying out a sibling.
It puts a lot of pressure on the one farmer to borrow money to pay for land his (or her) family already owns, he pointed out.
Landowners need to make decisions about the family farm, weighing fair versus equal, and communicate the plan clearly to family members.
Unlike the lottery, the chances of children inheriting the farm is high, and if it passes through an estate, the new per-acre basis is reset and that only encourages the sale of the land to someone outside the family, he warned.
Stepped-up basis reflects the changed value in an inherited asset.
If a farm was originally purchased at $1,000 an acre, but is now worth $10,000 an acre, that additional $9,000 will be taxable if gifted or sold. But if the land goes through an estate, the land is given a new basis and the heirs can sell the farm for a lump sum and not pay tax on the stepped-up basis, he said.
If keeping the farm in the family is important, Next Gen urges landowners to take steps while they’re still alive.
“We’re still big fans of sale contracts,” Downey said. “We think they’re kind of a lost art. We still think they’re still a huge tool in the world of farm transition. Sometimes a well-structured contract can be a win-win for both parties.”
Added with some gifting strategies, a contract sale to a family member can reduce tax implications.
Succession plans shake out two ways– you either distribute all land to the farm heir who will continue to farm, or to all children, regardless of interest, he said.
There are a lot of pieces to the puzzle, including ownership, which can take the form of joint tenants, tenants in common, a revocable or non-revocable trust, a C Corporation or an S Corporation.
A lot of equity can be lost to estate and inheritance taxes, and while some attorneys are willing to negotiate a lower rate, probate administration can cost up to two percent. A new flat tax rate for C Corporations is prompting a lot of conversions to S Corporations, Downey added.
When siblings own land jointly, it often only takes one to force a sale, he said.
To avoid joint ownership, many landowners have left non-farm assets like life insurance to non-farm heirs, or used the estate as a contingent beneficiary of life insurance to protect children from debt claims.
Farm owners can also use their lifetime federal estate tax exemption to gift a portion away while they are still living.
The exemption could also be used with a sale contract to lower the price per acre, he added.
The lower price per acre results in less of a step-up basis, and with a zero percent federal capital gains rate up to $80,000 for a married couple, the tax implications could be negligible, he said. The State of Iowa also excludes a sale to family members from state capital gains taxes.
Whatever the decision, letting the family know about it in person often carries more weight and causes less family friction, he concluded.

“The fact of the matter is a lot of our retiring farmers are going to turn into land owners. We have this bigger pool of land owners now to match up with a smaller pool of producers. For every farmer under the age of 35, there are six that are over the age of 65.”– Mike Downey, Next Gen Ag Advocates