How to know the next generation is ready for asset transition

Submitted by M.N.

My husband and I want a well-defined transition process of our farm assets. Because of our management and hard work building this farm operation, we have paid off debt and realized the result: a large net worth. We are also blessed because we correctly hired our two adult children to work in the business. They’re proving their value in both labor and management, and they work well together. Our concern is transitioning the farm assets to our next generation. We’ve seen what happens to some young adults who receive (or know they’re going to receive) a boatload of inheritance. We’ve also seen young people who are standing on their own two financial feet, living within their means. Can you give us some ideas of when to begin transitioning the farm assets? 

The Solution

Good for you for looking beyond the easy way of dividing everything equally among the heirs at the time of death with no assurance they will stick with the farm or that the business can continue. Instead, you want your children to work hard, think of others, and have respect for what they have and earn.  

I’m assuming that you have just the two children and it is your (and their) expressed goal that the integrity of the farm business continues after you’re gone. If so, here’s a solid foundation that fosters a successful transition.

• Take care of your financial needs first. Never transition assets you need to own and control if they are required for the living and lifestyle you’ve earned and deserve.

• Allow for incremental transition of assets and liability protection. Create separate structures (LLC, corporation, etc.) for the land and the operation with buy-sell agreements for each. 

• Agree upon and inform children of prerequisites before you transition assets. (Ideally, owners outline this while their children are in middle school, but it’s never too late to begin.) Here are seven prerequisites I recommend.

1. Education: A minimum of a two-year degree in an area of study that benefits the operation.
2. Experience: Initially work full time for a nonfamily boss for at least two to three consecutive years, receiving good performance reviews and promotion for contributions.
3. Skin in the game: A minimum personal financial investment demonstrating commitment that this business is a personal priority and a financial investment for the future. (This is not financed by the farm or senior generation.) 
4. Sweat equity: This is earned compensation equal to true monetary value minus the compensation the business is paying. The difference is rewarded by asset transfer annually, not at the time of death. 
5. Fire in the belly: Proven self-starter demonstrating this is a job of choice, even during tough times. Maintain high standards and have a passion to learn and work independently and well with others. 
6. Compliance: Adherence to and support of existing policies and management practices, and the willingness to teach and lead through necessary changes.
7. Positive reflection: A good commercial for the family, business, and agriculture.  

The fear of many parents is that transitioning assets can squash ambition and drive. I’ve found that not transitioning assets will also have the same result. Do not rob your kids of the zeal to earn a living, build equity, and make an impact. Your careful consideration of their readiness is one of the most important decisions in a business transition.