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Senior Contributor

Ag group stresses importance of succession planning

An article on the issue of succession planning. It's always interesting to see how other farmers handle this very important function of handing off to the next generation.

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Aging farmers must decide: What is a fair share?

 

Ag group stresses importance of succession planning

 

WASHINGTON — When Varel Bailey and his fellow shareholders meet this month, the seven-member family board that includes his three children will focus its attention on one issue: Who should benefit from the financial success of the farm?

Bailey’s parents first began giving shares annually in the Anita, Ia., farm in 1966 and continued doling out stock equally to their three children during the next 40 years. While Bailey stayed on the farm and helped increase its value, his sisters left and now at least one of them wants to receive full value for her shares. But Bailey believes she is entitled to one-third of the value of their parents’ estate at the time he joined the operation — not a third of its value today.

As the 73-year-old crop and livestock operator prepares the 1,200-acre farm for the future, Bailey is working to determine the “fairness factor,” as he calls it, to reward his son, Scot,who has worked with him since 1990, while also fairly rewarding his two daughters who left the farm to embark on successful careers outside of rural America. Currently, each of his three children would receive a third of his shares.

“We’re working on a deal and saying, ‘OK, is there a way to calculate our son’s contribution to the creation of wealth that his two sisters didn’t participate in,’ ” said Bailey, who added that keeping most of the stock owned by people working on the farm is important for the long-term viability of the business. “Shares owned by distant relatives with little or no connection to the farm threaten the financial stability.”

The “graying tsunami” in rural America means that more farmers are being forced to decide what happens to their farm once they retire or die. If they decide not to sell their businesses, farmers must decide how to divide the operation among the remaining relatives, many of whom are not farmers.

The process is further complicated because most farmers reinvest any profits back into the operation, leaving much of their personal wealth tied up in the business through equipment and increasingly valuable land. If one relative decides to sell his or her position, it can be difficult for the primary farm operator whose assets are tied up in the operation to get enough funding to buy the relative out, potentially threatening the financial health of the business.

As the number of U.S. farmers declines, the age of those still toiling in the field continues to climb. The U.S. Department of Agriculture, for example, estimated in its 2007 census that the average age of principal farm operators, people in charge of day-to-day operations, was 57, compared with 54 a decade earlier. Across the country, about 230 million acres were controlled by a principal operator 65 or older.

“With the aging of the farm population, and particularly with the rapid appreciation of land values and the assets, there certainly is a need to plan how those assets are going to be transferred and if you want the business to continue,” said Ron Durst, a tax specialist at the USDA’s Economic Research Service.

Most estate and succession planning is done privately, with farmers working closely with accountants, lawyers or other individuals. As a result, there is no available data to show what percentage of farmers have already decided what will happen to their farming operations.

Julia Freedgood, managing director with American Farmland Trust’s Farmland and Communities Initiatives, said the group has focused on estate and farm succession planning for more than 20 years. But the organization refocused its efforts last year after finding that farmers were not doing enough to prepare.

Knowing that it can’t help all farmers on its own, Freedgood said American Farmland Trust has published training materials and held classes with extension agents, attorneys, accountants and other groups who work closely with farmers to get the word out.

The initiatives have proved to be popular. One training program in New York and New England, which is underway for advisers who work with landowners and farmers, got requests from people outside of the region, including the Midwest. They were turned away.

It seems like a lot of people aren’t doing it, which is why we hear all these horror stories about families losing their farm because they didn’t plan for it,” Freedgood said. “As the farming population ages, this problem is going to get worse. Even though it’s an incredibly valuable asset, people don’t just think about it that much.”

The reasons some farmers avoid estate planning, experts say, include time, an ever-changing and complicated tax code, and the reluctance to think about a future without them in it.

Farmers received a small dose of certainty in January when Congress restored the exemption level of the estate tax to $5 million — it had been in danger of falling to $1 million — despite increasing the top tax rate to 40 percent from 35 percent. A $1 million threshold would have required a deceased person’s estate to pay taxes on any inheritance above that level.

Scott VanderWal, president of the South Dakota Farm Bureau, who farms with several family members near Volga, said ownership of land purchased by his grandfather in the 1940s was passed on to his father and uncle. Now, he said, the challenge is to fairly distribute the assets to the six family members in his generation, and ultimately to the 19 children in the following generation.

“I think the attitude of the older generation was ‘Well, everything will work out,’ but when it gets to the point where there are so many people involved you have to take a proactive stance and actually do some planning,” said VanderWal, who farms about 1,300 acres of land.

VanderWal said his dad and uncle are considering meeting with an estate planner or attorney later this year.

“It’s like they say alcoholics need to first admit they have a problem. It’s kind of the same way with estate planning,” he said. “We kind of decide that we need some help and we need to get this done instead of just assuming it will all turn out.”

For some farmers, though, it’s hard to plan for the future without knowing if the farm will even be there. Dave Miller, 61, a corn and soybean farmer with land in Lucas and Clarke counties in south-central Iowa, said before he can do an estate plan he needs to figure out if the farm will continue to operate without him and who will oversee it. A few of his grandchildren have expressed an interest, he said, but it’s too soon to know if they will be willing to take over the farm when they get older.

Miller, who sold family land in Indiana before buying his own land with his brother in 2003 as an investment, said he has no emotional ties to the land and is not sure how much longer he wants to continue farming.

“The question is, is there an ongoing business?” he said. “At the moment we’re still in the early scoping out phase because we haven’t identified anybody necessarily to continue the business.”

 

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9 Replies
Advisor

Re: Ag group stresses importance of succession planning

Give me a break!  Soooooo . . .  poor Bailey who apparently lacked the ambition to pursue his own goals in life and stayed home to live off assets handed down by mommy and daddy is more entitled to land because he made the big decision of staying on the farm that mommy and daddy assumed the risk for paying for.  

 

I think the intention of the parents is clear, each child shares equally as evidenced by the gifting of shares in the farming operaton.  The siblings who took their chances in the real world, without mommy and daddy underwriting thier risks have the same birth right as the on farm nimrod who chose the security his parents provided.   

 

This is just too much for me to handle . . . I think all of them should share equally in the labors of their parents even if they need to force sale or break up the farm.  Let the corporation sell its land and then repurchase the shares outstanding from the holders. 

 

Why should any shareholder have preference over other shareholders.  They were all equal in the eyes of their parents.   Besides . . . I am sure Bailey had plenty of chances during his farming career to accumulate his own personal holdings of land if he wanted to assume the risk.  

 

I really enjoy the horror stories that estate planners spread so that they can get their hands in the pocket of those who hold the gold.  Right now there is no estate to plan if the stock is held in the names of shareholders, corporations are perpetual and live foreever.  

 

The question is what is the stock worth at the death of an existing shareholder, there is absolutely nothing stopping them to gift their stock in the farm they more or less inherited to their children or a trust . . . I mean if you do not want to pay inheritance taxes . . . give it to ISU and do not pay any taxes.  Sometimes when a person dies it is easier to pay the tax the expend the money on shylocks trying to save you money.  

 

According to the rule in Shellys Case, you can place property in trust for a life in being plus 21 years.  So if you were to tranfer stock in trust of a grandaughter 2 years old, and she lived til she was 90 years old, you could tie the land up for 119 years.   Stock can be gifted, better start gifting it into a trust.  

 

Believe me land is not going to stay at todays levels, you should have gifted the stock in the company back in the 1980's when land collapsed, those who did are now on the other side of estate tax  problems, if they were incorporated.  

 

I know . . . I know . . . it is an ego thing . . . being able to tell everyone you own ten zillion acres when you would be better off just controlling it and really owning nothing in your name when you die . . . and you will die. 

 

The fella in Clarke county, makes me laugh, I think it is sad commentary regarding the younger generation when they are not interested in farming and with a small inheritance could obtain a foot hold.

 

 My contention is that people who want to farm will find their own way.  In the case in Clarke County, maybe he should just sell the farm, distribute the proceeds, so all the decendents can purchase themselves a cadillac and rent a condo in Malibu.   Maybe he could give it to the catholic church.  

 

What he is facing, from the way in read it,  is that he has no one who has risk taking ability in his family and wants to undertake the risk of farming.  Besides . . . if the land is located in Lucas or Clarke County (my corporation has farmland in kamakazie country down there) he can wait til it drops back to $400 an acre . . . I mean we are not exactly talking RSW Country values down here.  I find it amusing that farmers actually believe that their kids or grand kids want to farm.  

 

I mean . . . I understand . . . that at one time . . . Iowa was going to reclassify "inherited land" in South Central Iowa as grounds for heirs to file "Child Abuse" claims.  LMAO!  Good Luck!   John

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Veteran Contributor

Re: Ag group stresses importance of succession planning

Let me get this straight Mr Varel Bailey has been using someones investment in the Farm Corporation for years and now they want the full value of those shares. Can you imagine that someone actually wanting their share Gee maybe he should look up the definition of a share.

Oh he knew all along he was using other peoples money to enlarge the corporation. But now that someone says I want out he wants to renig on the deal. You don't get to use other peoples money and when it comes time to pay cry like a baby its mine I stayed home you didn't. My guess would be he couldn't make it in the real world so he stayed where it was safe Dad  bought his house provided him with all the comforts of never having to leave home. People like this just burns my ass. Buy em out they eaqrned it putting up with someone like him deserves the money.               

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Senior Contributor

Re: Ag group stresses importance of succession planning

Yes, I agree with you Minnisota. Personally I have gone out of my way to be completely fair to my 3 kids on my Estate Planning.

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Veteran Contributor

Re: Ag group stresses importance of succession planning

Wish I could get a recording of this meeting their having. Hope the person wanting out has his lawyer with him because you can bet Mr Varel Bailey has one if not two. My advise to anyone going to one of these meetings is have your lawyer attend., If ya don't ya gonna get screwed. Does anyone know the person wanting out?

 

All I can say is if ya want to see your family fall apart start one of these Farm corporations. Put one of them in charge(give them one more share than the others just to make sure you cause a problem) The only people who gonna win are the lawyers. The family will suffer as the man says (" I guarantee it") 

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Senior Contributor

Re: Ag group stresses importance of succession planning

I have a farm corporation and I gave one daughter one more share than the other one because the one with one least share was going thru a messy divorce and the ex was trying to get part of the corp. I was going to make sure that he could not control the corp.

Her lawyer made sure that he didn't get it. Both daughters were happy that I did that

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Advisor

Re: Ag group stresses importance of succession planning

The son is just as entitled: if someone stays back depending on someone else they are at risk too. 400 acres is not enough for an independent, and will cause the sale of the entire operation unless he can rent land. But you Americans pay too much rent... So **bleep**ed either way.

If the son is smart, his lawyer will force his parents to give him back pay for his work: same as no paid farm wives
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Re: Ag group stresses importance of succession planning

I think it is just fine to treat all heirs, farming and not, equally as a matter of the estate. That's the person's right as he or she chooses.

 

The caveat to that is that then the farming heir(s) shouldn't be tied to the parents operation/corporation. If they'd been encouraged to spin off their own operations with the the considerable advantage of being tied to the stability and scale of the parent operation that is a really, really big advantage in it's own right.

 

Hey, it may not be the whole enchilada but if the son has bought a few hundred acres over the years, farms many hundreds more, or other enterprises, and inherits 400 he's going to be fine and is probably a better manager for it.

 

If they couldn't make it then, so be it, probably all for the better and they'll have some assets to do what they're going to do. Sell it all and move on.  "Family farms" are like every single other business- eventually they die, just like people. The trick is to do the best you can taking care of the people. Nothing the matter, though, that some of that future includes somebody farming.

 

Of course there are such things as untimely deaths and other unforseen events but impact of those can be somewhat reduced with insurance, continued updating of the estate plan etc.

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Senior Advisor

Re: Ag group stresses importance of succession planning

The way I see it is that any compensation owed to stay at home son should have been paid as the work was done. You don't wait for 40 years and then claim the folks owe me this and this and that!

 

No way Jose! If I owe my kid money he needs to bill me as it occurs and we will settle up on the spot. I am not going to allow you to wait until I'm in the box and then claim I owe you two million from work done over the last forty years.

 

If sonny boy deserves something special do it while you are still alive and make sure his siblings understand. Of all the work I did for may dad over the 40 year period that I enjoyed his presence, He didn't owe me a nickle upon his demise. Why?  Because I didn't keep score and neither did he. I'd give an arm and a leg to have him back even though he would be getting alittle long in the tooth.

 

I don't know why children don't simply ask for compensation and tell parents what amount you expect. Then the parents have the right to decide whether his demands are wortjh what he expects. My son would exect a fair and equitable share of our estate. AS would his siblings. Because sonny boy were earn what he gets and their would be no question who owns the real estate and who owns the machinery and who gets the crop.

 

He would be running a seperate business from mine and he would enjoy the benefits of his share and his labor. I suspect his sibling sisters would want him to succeed but would also want him to do so at market values. When it comes to rent or return on investment values. he would have to compete in the market place as would anyone else. There would be no speculation about whether his sisters should give him a break.

 

Sometime people need to grow up and manage for their own future. Nobody owes you a fortune. Be thankful for the inheritance and don't expect the whole shebang at expense of your sisters or siblings. Don't put that kind of pressure against mom and dad. Who knows they may care just a little bit about your siblings as well.

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Senior Contributor

Re: Ag group stresses importance of succession planning

I agree.

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