A Wisconsin dairy family seeks guidance on transitioning their farm to the next generation. Experts offer advice on LLC formation, asset transfer, and retirement planning.
Answers are from the Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis.; Sam Miller, retired managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Extension economist, University of Minnesota Center for Farm Financial Management. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email fran.oleary@farmprogress.com.
My son, my wife and I milk 160 Holstein cows and own 400 tillable acres in central Wisconsin. My wife and I are 64 years old, and our son is 31. He graduated from the University of Wisconsin-River Falls with a degree in crops and soils sciences. He worked for three years as an agronomist for our local co-op and then decided he wanted to return to the farm. He bought half the cows and most of the machinery six years ago. Now he wants to buy the other half of the cows and heifers. We are not sure if he should rent the buildings and land from us or if the three of us should form an LLC. Our goal is for our son to continue farming and for us to buy a house in town and eventually retire.
My wife and I are debt free. Our son owes $79,000 to the bank for the cows and machinery. He is engaged to be married this summer. His fiancee plans to continue working full time off the farm. Our cows average 90 pounds of milk per day and have a somatic cell around 125,000. We milk in an 11-year-old double-eight parlor and have a 160-cow freestall barn with three maternity pens. We sell about 75 beef-on-dairy Angus calves when they are a few days old for an average of $800 each. I’m sure our son will eventually want to increase the herd size and build a second freestall barn. He will need to rent some land. We hire the combining done by a neighbor.
Who should we talk to help us make a plan? We are comfortable at our current size, but we don’t know how much or when our son should expand the herd and acreage or how much debt he can handle. Please advise.
Start by having discussions among the four of you — you and your wife, and your son and his intended wife. Encourage open discussion so everyone has their viewpoints heard and evaluated to the best of your family’s ability. Develop a written framework of everyone’s ideas, so no ideas are brushed aside and no one is left out of the conversation. Then, involve a professional in farm transition and get his or her viewpoints included in the discussion. As an example, are their other heirs involved, or is your son your only heir? If there are others, this can change things tremendously.
Your goals seem simple enough: to be able to buy a different home and enjoy a comfortable retirement. Remember, you have earned it! Without being in on the discussion, it is hard for me to recommend many of the details on the path forward. I would, however, set up a limited liability company that includes the cattle, machinery and everyday operations of the farm. Many times, the land is not included in the LLC because this asset can be transferred upon your death by the use of a trust or other legal mechanisms. This will give your son a stepped-up basis on the land and will avoid tax burdens for you and him. But again, every situation is unique and should be handled with this in mind.
You are looking at this time to get cash out to buy a new home. If your son bought out your share of the remaining cattle and machinery, this probably would supply enough cash to do this. Do things that work for the entire family long term.
Miller: You have options. Fortunately, your financial position plus your son’s investment in the business provides multiple options for the business moving forward. Consult with both an attorney and a qualified farm business consultant about the pros and cons of forming an LLC — and specifically about ownership transition, liability protection and tax implications.
The dairy business consultant can assist in transition planning and forecasting options about buying the rest of the personal property and renting land and buildings vs. forming an LLC. This will guide the ability to afford a home in town, provide retirement income and for the business to support the additional debt service or rental payments. You are in a great position for the next step transitioning the business. Meet with professionals who can assist in making this process a success.
Wantoch: An article from the University of Wisconsin Extension’s publication Cultivating Continuity: Expert Insights for Farm Succession highlights that the owner generation often focuses on their desires for the farm during the succession process. It sounds like you have already clarified your intentions, values and vision for the farm, as well as your retirement plans. Great job! Your next step is to consult with agricultural professionals to help you achieve these goals. Research indicates that the primary challenge for successors is the capital needed to purchase a farm, as high land prices make it difficult to secure loans.
I recommend developing a plan for your son to acquire livestock, machinery and possibly real estate before considering a future farm expansion. You might consider offering these assets at a discounted price or through partial gifting. However, if you rely on the sale of the farm for your retirement income, it’s important to recognize that successors like your son may not have the financial resources to purchase the farm outright. Focus on creating a plan that addresses both your needs and your son’s needs for the successful succession of your farm business.
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