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

Abstract

This study presents a conceptual framework and empirical farm-level model of wealth creation and accumulation and incorporates the life-cycle patterns in farmer productivity and consumption to analyze how the timing of farm transfer initiation from the older to the younger generation impacts the terminal wealth in the business and thus the likelihood of the firm’s future continuity. The results of a representative large grain farm in Iowa confirm that the timing of a transfer is determined by two major tradeoffs: first, between the younger generation’s productivity and consumption withdrawals and, second, between the firm’s growth and transfer taxes. Given the age of both farmers (older and younger) used to populate the model and their respective consumption levels, the gain in total farm’s productivity is much lower compared to the loss of equity associated with additional consumption withdrawals resulting in reduced firm’s growth. Therefore, early transfer is not encouraged when no off-farm income is available and/or tax savings cannot justify the reduced firm’s growth. Generally, a preferred timing strategy is responsive to the availability of off-farm income (or level of equity withdrawals for younger generation’s consumption), the type of business model used to involve the younger generation in the farm business prior to the transfer initiation (active or passive successor), and expectations about farmland prices.