Farming. It’s a term that can mean different things to different families. To some, it is a way of life and a family business, the glue that brings multiple generations of a family together as a unit. To others, it may be the reason families push each other away.

Whatever your feelings may be, it can go without saying there were long days, months, years and decades of hard physical work as well as enormous emotional and mental stress. But over the years, the farm that was once a small business with some value is now a significant asset worth a small fortune, and you are ready to retire. But what now? What’s the next step?

This is a situation many are faced with. It’s a stressful time because the lifestyle you want to have in retirement with your spouse hangs in the balance, and your legacy to your children or grandchildren can be affected positively or negatively. Take your time and plan it right. To start, we must first determine what we want our retirement years to look like.

Do you still want to farm?

There are a few questions to ask yourself. (This is not to be seen as advice but rather questions and situations I have come across that may get you thinking.) What do you enjoy about your farm? Do you see the “work” you do as recreation? Are you the type that wants to “die on the tractor”? Do you enjoy hunting, trail riding, etc., on your property?

Or do you enjoy activities away from the farm, such as traveling, biking, camping, etc.? Is there significant sentimental value to the farm? How you feel about these questions helps determine very different avenues to explore. Let’s make an example and assume a retired couple (Mom and Dad) does not wish to operate the farm anymore.

Legacy and heirs

If Mom and Dad don’t wish to operate the farm anymore, are your kids or grandkids involved on the farm or want to be involved? If not, do your heirs want the actual land itself – or instead the value of what their potential share is worth? There is a big difference.

If the kids are not interested in the physical land and not involved in the operation, yet you want to leave legacy assets, determine if leaving them the full value of your property (maximizing the estate) is a top priority. Or is there a specific dollar amount you had in mind? Maybe the big question that needs to be addressed is: What can you afford to leave heirs without affecting your retirement lifestyle?

Retirement lifestyle vs. legacy

It is well-known that farming is often an equity-rich, cash-poor occupation. If the equity is in the form of real estate, the best part is: It is often a conservative investment. The downside is: It is not typically a very liquid asset, and you typically cannot access the principal value unless you decide to sell the property. You can only access the interest, or rent, it generates. Will the rent income be enough to fund the “retirement” you envision?

Every dollar you give or lease is a dollar of potential lifestyle you give up. It seems like a very obvious statement, but it is somewhat overlooked. What the questions help us transfer into is the conversation of what Mom and Dad’s dream retirement lifestyle looks like. Are there places you have always wanted to travel? A truck, boat or camper you always desired? Or maybe you just want time away to fish?

These questions work parallel to the timeline in which you want to experience your retirement adventures. For example, I like to call your early years of retirement your “Go-Go” years. These are the years you will be the most active because you will have the most energy and capabilities with your health to fully experience your “bucket list.”

These “Go-Go” years will be followed by “Slow-Go” years, in which you will still be somewhat active but slowing down and not spending as much on “fun” activities as your “Go-Go” years. The last phase is what I call your “No-Go” years, which is typically the time you spend the least amount on “fun” activities in retirement.

The bottom line is: Will the rent income from the farm be sufficient enough for you to live the dream retirement you pictured during your most active years? If not, are you willing to give up some of the items on your bucket list to provide a potentially larger estate to your heirs (i.e., pass the entire farm onto your heirs)?

For example, let’s assume Mom and Dad are an active, healthy couple in their early 60s. They are no longer actively operating their farm. They have interests outside the farm and a “bucket list” they want to pursue.

They set a goal that they have 12 active years to experience this “bucket list.” The kids are moved far away with no interest in operating the farm. Let’s assume the farm is worth a little more than $1 million, and Mom and Dad want to leave a total legacy of $1 million to their two children. What should they do?

After analysis, it was determined they would always have enough income from sources other than the physical farm to meet their essential costs (increasing with inflation over their lifetime) and able to take certain financial risks off the table.

However, we found they would not have enough rent income from their land to accomplish all the items on their bucket list during their active years. When asked if they were willing to cut back on some of the items on their list to leave the full physical land of the farm to their heirs, they said no.

After some planning along with their accountant and attorney, they decided to sell their entire farm but maintain the rights to stay in their current home for their entire life. After paying the capital gains taxes, we utilized an interest-generating account (assuming a very conservative 3 percent annual return) and projected they will have the liquidity and ability to spend $65,000 per year over the next 12 years (their “Go-Go” years) on their bucket list items.

To boot, we were also able to guarantee their goal of leaving $1 million to their heirs, tax-free, regardless of when they passed away. They were ecstatic. This was made possible by utilizing the principal value and leveraging financial tools to fit their goals.

In closing, this topic can be controversial in general. This article only touches the very tip of the iceberg of options in your overall plan and should not be relied upon when making a determination of how to live your retirement or plan your estate.

This example is in no way advocating the sale of your farm but merely giving a simplified example to spur “out-of-the-box” thinking. In another article, we will address some of the great benefits of leaving the actual land to heirs.

Seek out multiple industry related professionals to customize the best options and course of action for your specific situation. PD

Jon Holthaus is a financial planner based in Wisconsin and serves clients in the U.S. and Canada.

• Jon Holthaus

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