Separate Business Of Farming From Land And Way Of Life

Merle Good has been advising farmers about business arrangements and succession planning for over 30 years, helping farmers develop strategies to cope with all sorts of challenges. His advice, especially for parents and children farming together, is to separate land from the business of farming.

“Seventy years ago, almost every farmer owned the land they farmed,” he says. “But today, the scale of equipment and of farming means that most farmers rent about half the land they farm.”

Most other businesses don’t own their buildings or place of business, Good points out. “Access to land is more important than ownership,” he says. He recommends treating your own and rented land similarly in your accounting, paying yourself land rent and making that the first cost for the business. This gives you a much better tool to compare rented and owned land.

“The farming business probably can’t afford to invest in farmland,” he says. “If you can’t afford to pay the market rate for land rent, maybe you can’t afford to farm your own land.”

Good advises working to develop a rolling lease for all your rented land. It’s a simple arrangement, in which landlord and tenant talk at the end of each year. If you’re both happy with the current arrangement you add a year to the lease. It gives you, as a renter, more security. You can plan and farm knowing you have the land for at least the term of the new lease. The landlord has an opportunity to address any concerns and to ensure the land is farmed well.

MORE COMMUNICATION

The real benefit Good sees in a rolling lease is that it forces the landlord and tenant to talk more. “It lowers the chance of losing the land over some little thing that could have been addressed easily before it became a major irritant,” he says.

He also advises starting farmers to make sure they go with their parent to talk to the landlord, rather than letting their father do it.

“Young people need to develop a relationship with the landlord so they can maintain it when they’re farming on their own,” he says. “Even if it’s your name on a written agreement, the landlord likely sees your dad, the guy he’s known for years and is closer to his own age. So, go and develop that relationship with the landlord early.”

Good carries his attitude to splitting land and the farming business into his advice for transferring the farm to the next generation. He strongly disagrees with the advice given by most financial advisers and succession planners that you form a corporation and bequeath each of your heirs a certain number of shares. He considers that a recipe for disaster.

“Leave some land or other assets to children who aren’t actively farming,” he says. “Leaving part of the farming business to somebody who hasn’t been part of building that business is a recipe for discord and all kinds of grief. I’ve seen all sorts of problems in this situation.”

Good suggests leaving more land to a non-farming heir is a better solution to the challenge of being fair to all children than giving them a share of the business. Even as a non-farmer that heir gains lots of tax advantages by inheriting land from a parent and renting it to a farming sibling.

For the farming heir, it’s easier to rent the land, or see someone else rent it than it is to deal with a sibling in their business. It can also force the farmer to see that if you can’t afford to buy land, access is the next best thing, says Good. “Land should be dealt with in your estate planning.” He differentiates estate planning, which is about wealth, from succession, which is about the business.

“Land is a physical asset, part of your personal wealth, just like an off-farm investment,” he says. “The farming business is separate. Succession, handing it on to the next generation usually starts earlier in an intergenerational partnership. It’s the transfer of business assets, skills, attitude and opportunity.”

Land may involve emotional attachment, but Good sees it as a much simpler asset to hand on to the next generation. And, treating land as an asset apart from the farming business makes it much simpler for the next generation to profit from, whether or not they actively farm.

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