The Impact of the Timing of the Intergenerational Farm Transfer Initiation on the Terminal Wealth in the Business: Simulation Model

This study presents a conceptual framework and empirical farm-level model of wealth creation and accumulation of the farm business and incorporates the changes in life-cycle patterns in farmer productivity and consumption of the older and younger generation. This method provides a vehicle to analyze the timing of farm transfer initiation and its impact on the terminal wealth in the business and the likelihood of the firm’s future continuity. The results of a representative large grain farm (more than $250,000 in gross sales, and $4 million in real estate) in Iowa confirm that the timing of a transfer is determined by two major trade-offs: 1) between the younger generation’s productivity and consumption withdrawals and 2) between the firm’s growth and transfer taxes. Given the age difference of the two generations (older and younger) used to populate the model and their respective consumption levels, the firm has experienced a growth reduction during the planning horizon. Therefore, the gain in productivity is much lower compared to the loss of equity associated with additional consumption withdrawals. Transfers made sooner in the life cycle are not encouraged when no off-farm income is available and/or tax savings do not offset the firm’s reduced growth resulted from an increase in consumption withdrawals. The preferred timing strategy is responsive to the following factors: 1) availability of off-farm income (or level of equity withdrawals for younger generation’s consumption), 2) the type of transition strategy (proactive or regular), and 3) expected future farmland prices. Adviser: Matthew Stockto