Life insurance sometimes plays a key role in a farm transition plan, with disability and other types of insurance potentially playing supporting roles. Fundamentally, insurance is about protecting you from unexpected financial loss– and this kind of protection is especially critical when you are planning to transfer your business, assets, and/or land to the next generation. Let’s do a quick overview of the types of insurance that can support your succession plan.

Life Insurance

Life insurance plays a crucial role in ensuring a smooth transition of a farm business to the next generation. It provides a safety net, stepping in to cover estate taxes, debts, and expenses if the farm owner passes away. Life insurance will also help to replace lost income in the event of unexpected death, providing security during a difficult time. This means the farm can stay in the family without the pressure of a rushed sale to cover unexpected expenses. Life insurance can also offer a financial cushion during the farm transition that can be used for hiring and training new staff or handling market shifts.

Life insurance also offers a solution for fairly distributing assets during succession. Farms hold significant value, and life insurance helps distribute that value evenly among heirs. Life insurance allows cash dollars to be passed on to non-farming heirs so that the farm assets can pass to the business successors, allowing the farm to stay intact while ensuring all heirs get a payout. This helps prevent family conflicts or hard feelings. Life insurance isn’t just a policy; it’s a vital part of ensuring the future of your farm and the well-being of your loved ones.

Disability Insurance

Similar to life insurance, disability insurance safeguards against unexpected events that could disrupt the transition process. If you or the current farm owner becomes disabled and unable to manage the farm, the situation could lead to financial strain and hinder the smooth transfer of responsibilities.

If you are planning to pass the farm off to a successor and then experience a disabling injury, you may be forced to sell a valuable asset to cover expenses– an asset your successor may have been counting on. With disability insurance in place, the policy would provide regular income replacement during your recovery period. This ensures that the farm’s operations continue without disruption, allowing your successor to gradually assume control.

Disability insurance can also cover expenses related to hiring temporary help or implementing necessary adaptations for a disabled owner. This financial support safeguards the farm’s viability during a challenging period, ultimately contributing to a successful and secure transition of the farm business.

The insurance plan itself is important, but odds are you won’t be able to go online and find the perfect plan for your situation listed on the agency’s website. This is where a working relationship with an insurance agent becomes important. Your agent will be most effective if you can explain exactly what your concerns are and the protection you are trying to achieve. The more your insurance agent knows, the better they can match a policy to your unique insurance needs.

Developing a relationship with your agent will also help you understand your coverage. Rare is the farmer that can read their insurance policy and assess for themselves whether the agent selected something ideal. In fact, you don’t often receive the policy terms until after you buy. It’s easier to have confidence in the policy you buy if you trust the person who sold it to you. That’s easier to do when they’ve developed a relationship with you and understand your goals.

Accurate financial statements that support timely tax filings are vital to a smooth farm transition process. These records help everyone get on the same page about farm financial health and viability. You may need a bookkeeper, a tax preparer, an accountant, or all three!

Bookkeepers

An accurate record of your sales and purchases is the bedrock of sound financial recordkeeping. Bookkeepers will create a record-keeping system and enter transactions in a consistent, timely manner, following standards that support your business statement goals– like matching transactions to budget categories and enterprise areas.

If bookkeeping doesn’t happen in an accurate and timely manner, it’s hard to do anything else– file taxes, prepare statements, or make decisions based on profitability of certain enterprises. If you find you often fall behind in entering your transactions or struggle with following bookkeeping standards, you may benefit from a bookkeeper. In fact, if your accountant or tax preparer has to spend a lot of time straightening out your bookkeeping, then hiring a bookkeeper could save you money in the long run.

Accountants and tax preparers

Accountants do the invaluable work of helping you understand your operation’s strengths and weaknesses. Understanding if the business is profitable is essential to a succession plan.  Your accountant will produce financial statements that help you value your business yearly so that you can make sound financial decisions and file accurate tax returns. These statements need to follow certain standards to avoid being considered fraudulent if you present them for lending purposes, or to avoid a violation of federal tax laws if you use them for tax purposes. Your accountant may also be able to advise on cash flow, liquidity, operating profit, and depreciation. For the succession plan itself, an accountant can help you navigate inheritance taxes, estate management, and how to value your shares (if your business is a corporation).

Tax preparation is a different realm of work. Some accountants will prepare taxes, but not all. Tax prep involves taking the forms and records the account maintains and turning them into the appropriate IRS forms. A tax preparer can also help your business minimize its tax obligations over time by optimizing your tax filings.

Financial planners

While accountants and tax preparers turn your ongoing financial life into neat and organized documents, they often aren’t as skilled in future forecasting or strategizing for retirement. Financial planners are ideal for assessing retirement goals and a strategy to meet them. A financial planner will help you deduce what you, as the outgoing owner, will need financially to live comfortably in retirement and at the end of your life. Financial planners advise on a range of retirement income sources including social security, savings accounts, and other investment and income sources. The next generation of owners may also use a financial planner to help with long term planning for retirement.

Financial planners are strategists and big-picture thinkers that can help you think through opportunities and implications of different decisions.  Financial planners are different from accountants in that financial planners focus on personal resources and retirement planning, not on business viability. Financial planners generally do not provide bookkeeping, accounting, or tax preparation services, although they often do sell investment products.  Some financial planners (like insurance agents) earn commission on the sale of investment products while others charge a fee.

If hiring a lawyer makes you balk, consider this: in the same way you would purchase an insurance plan to help you in the event of a car accident, investing in an attorney upfront will help you with unforeseen complications in your farm succession plan. Early death, disability, conflict over asset distribution, and diverging business visions can suddenly throw your succession plan off its course. The proactive assistance of a lawyer will help you anticipate and prepare for these circumstances, and provide a legally enforceable path forward that honors your original vision.

However, it’s worth highlighting that an attorney’s services are most useful and cost-effective at certain points in your succession planning journey.

Sub-optimal uses for an attorney are:

• Helping families or individuals make decisions

• Fostering consensus with a family or group

• Generating creative ideas or solutions

• Identifying general trends

• Teaching legal concepts and background knowledge

Why? Because these are areas where you and the other stakeholders involved have the most wisdom and power to handle yourselves. Will it take some time and effort? Yes. Will it be worth it? It’s highly likely, as you will all gain a better understanding of the situation for having learned and discussed issues yourselves.

As we mentioned above, knowing your vision– what you want from your succession plan– will be important as you speak to any of your professional advisors. This is especially true when it comes to attorneys. An attorney can draft an agreement or legal document for you, but they can’t possibly know what terms or procedures to enshrine in those documents unless you tell them. They also can’t provide financial planning or help you decide who inherits what. So while we recommend bringing any of the other professionals listed here into your planning process early, attorneys are likely to be most helpful later in the process: when you’re ready to start putting some agreements in writing.

Optimal uses for an attorney are:

• Taking the parties’ decisions and turning them into a clear, consistent, enforceable document while informing the parties of any limits to enforceability.

• Time-sensitive matters

• Matters where significant money, property, and/or opportunity are at stake

• Assessing the specific risks of failing to come into compliance

• Analyzing and/or protecting the enforceability of an agreement

• Detailed assessments of risk exposure in complex situations

• Adding gravity to the commitment

Whether you are looking for an attorney, accountant, or insurance agent you’ll want to find someone with knowledge and values that match your vision. Here are some tips to guide your search for the ideal succession team.

Find good partners

Consider asking your potential advisors these questions as you consider whether they are a good fit for your needs:

• Do you have experience working with farm business succession? What did the succession plans you created look like?

• What challenges have you seen when working with families and farmers on succession plans? Have you seen successful models? What factors lead to success, in your experience?

• What is your preferred form of communication, and how quickly can you respond to questions?

• What documents and information do you need to accurately assess my situation?

• Can you give me the name of current or prior clients like me I could speak to?

• What do you need from me for a successful relationship?

It’s ideal to find advisors who are familiar with farm businesses. This may be difficult. Nevertheless, start by asking your local agriculture community if anyone has any recommendations. If that doesn’t bear fruit, expand to ag communities in neighboring counties or states.

Prioritize ongoing relationships

Remember that succession planning requires a highly individualized plan that will only come from ongoing, long-term support from advisors who understand your vision. You will find online providers that offer plug-and-play legal documents and financial reports after gathering basic information from you. These are unlikely to meet your needs. Honor your future goals by spending the time and money advisors who can be with you for the long haul.

Manage your aversion to expense

Attorneys, accountants, and insurance are expensive. When it comes to hourly rates, keep in mind that an inexpensive but inexperienced accountant or attorney may end up costing more than an expensive one who is well-versed in farm succession. The hourly rate includes the amount of time they may spend on a given task– generally, the faster an advisor can work the less expensive they may be in the long run.

So how do you actually find these professionals? We don’t have a magic formula, but we do know the best place to start is with your peers. 

Start by asking yourself: Who do I know that has gone through the process of succession planning? Ask them who helped them along the way. Reach out to your local farming community or extension office to get recommendations. If you can’t find a professional with experience in farming specifically, try broadening your search to include professionals who have experience with small business succession. And remember that you have a community to support you! Ask your family, friends, or business successor to help you search for professionals to join your succession team.