6 Tips to Kickstart Succession Planning with Your Business Owner Clients
Here are 6 tips you can share with your business owner clients to help kickstart their succession planning.
According to the most recent 2017 Census of Agriculture, the average age of a U.S. farmer is approximately 57.5 years old, and one-third of US farmers are 65 or older1. Those numbers make it clear that farmers are generally not retiring at age 65. That comes as no surprise to this author, who comes from a family of farmers and still resides in a farming community. Farmers that I know work for as long as they are physically able, however long that may be.
Yet even though many farmers lack a “plan” for retirement in the traditional sense, farmers still need the help of financial professionals. First, farmers need a trusted financial professional to help them understand how decisions around Social Security and Medicare will impact their finances. Second, but of equal importance, farmers need expertise to help transition their farms to the next generation while also creating a source of retirement income.
Although the full retirement age for Social Security is now 66 and climbing (to age 67), individuals may choose to receive Social Security benefits as early as age 62. However, for those who start drawing benefits early, those benefits will be reduced. On the other hand, individuals who delay the start of Social Security beyond their full retirement age (up to age 70) are rewarded with an even higher Social Security benefit. In general, it is best to delay the start of Social Security if financially possible, particularly for those who are healthy and expect to live into their 80s or beyond.
However, many farmers (like my own dad) do not follow that rule. Because of the physical nature of much farm work, some farmers may need to start their Social Security benefit early because they can no longer physically work (if they are not already receiving Social Security Disability payments before age 62). Another factor to consider is that some farmers may not expect to live into their 80s and are consequently more likely to choose the reduced payments that begin before their full retirement age. Some farmers may also start Social Security benefits early because they plan to rely on the steady source of income it provides to cover the costs of Medicare premiums, which generally start at age 65. (Read more on Medicare, below.)
Finally, some farmers may have a modest Social Security benefit because of a varied history of farm profitability, and if they are married with a spouse who works off the farm, the non-farming spouse may have a greater Social Security benefit. In this instance, the farming spouse may choose to go ahead and start receiving their own Social Security benefits early and let the spouse whose greater Social Security benefits are attributable to off-the-farm work delay the start of Social Security.
Regardless of the reason, working with a farmer and their spouse, if any, on a holistic Social Security optimization strategy, can really make a difference to your farming clients.
Most people become eligible for Medicare at age 65. For those approaching that age, the only additional requirement to be eligible is that an individual meet any one of the 3 requirements:
Once a farmer enrolls in in Medicare, it will be important that they understand what is and what is not covered.
Medicare covers both inpatient care after being admitted to a hospital (Part A) and outpatient care outside of a hospital admittance (Part B). Inpatient care covered by Medicare also includes skilled nursing care for up to 100 days following a three-night or longer hospital admittance, hospice care, and possibly home healthcare as well (but only when certain physician-certified conditions are satisfied). Outpatient care covered by Medicare includes physician services (outside of a hospital admittance), ambulance services, durable medical equipment (such as canes, crutches, wheelchairs, or walkers), and preventive benefits such as an annual checkup and cancer screenings.
It is also very important to be aware of a few important things that Medicare will not cover, the most important of which (for most people) is prescription drugs. If an individual needs prescription drug coverage, they will need to buy a supplemental Medicare prescription drug plan (Part D) from a private insurance company. In the alternative, they can buy a Medicare Advantage Plan (Part C) from a private insurer. Medicare Advantage plans replace “original” Medicare (Parts A & B) provided by the Federal government, and usually include prescription drug coverage. In addition, Medicare does not cover most dental, vision, or hearing care. That last exclusion, hearing care, is particularly unfortunate for my father, who like many farmers, has very bad hearing loss after a lifetime of working around heavy machinery. My dad must pay for his hearing aids out of pocket; he is 68 and already on his third set!
Helping navigate the Medicare enrollment process by making sure your farmer-clients sign up at the right time and select the right type of Medicare plan(s) is a crucial task. Planning for current and future medical care, and how to pay for it, is even more critical for farmers because of the physical nature of their work and a lack of quality healthcare in many rural areas.
All farmers will need help determining the optimal Social Security benefit strategy and choosing the best Medicare plan, both of which will have a significant impact on their monthly retirement income and expenses. Another way to help farmers is to remind them of other options for saving money for retirement income once their farming days are over.
One way to do that is to encourage them to contribute to individual IRAs, or set up SEP or SIMPLE IRAs or even a full-fledged qualified plan. These are all various retirement savings vehicles with the added benefit of allowing them to defer current income taxes. For those farmers with spouses who work off the farm, maximizing the retirement savings potential of an employer-provided retirement plan is another way to coordinate retirement income planning between spouses.
It may also be possible to help farmers transition their operation while at the same time providing for retirement income. Depending on the facts and circumstances of individual farmer-clients, grantor retained annuity trusts (GRATs), installment sales or self-cancelling installment notes (SCINs), or private annuities are all possible ways for farmers to receive retirement income while transitioning the farm to a younger generation. Note that all of these options would require the involvement of various professionals such as attorneys, appraisers, etc.
Even though most farmers do not plan to “retire” in the same way that most non-farm workers may, they still need help making decisions around Social Security and Medicare, which is a critical part of any comprehensive retirement income plan. Farmers, like everyone else, also need some source of retirement income; and like any other business owner, farmers also need guidance to help transition out of the business. Nationwide’s Land As Your Legacy® team can help with all of this. We are committed to providing you with the insights, education, and planning resources you need to help your farming or ranching clients make informed, confident choices when preparing for (or living in) their unique version of retirement.
US Department of Agriculture, National Agricultural Statistics Service. Census of Agriculture: 2017. See Table 52, .
Disclosure: This information is general in nature and is not intended to be tax, legal or other professional advice. The information provided is based on current laws, which are subject to change at any time, and has not been endorsed by any government agency.
Neither Nationwide nor its representatives give legal or tax advice. Please have your clients consult with their attorney or tax advisor for answers to their specific tax questions.