FARM & RANCH ESTATE/SUCCESSION PLANNING
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FARM & RANCH ESTATE/SUCCESSION PLANNING
Succession planning is a process for identifying and developing new leaders who can replace old leaders when they leave, retire, become disabled or die. In a family business, it entails mentoring the next generation with the potential to fill key business leadership positions in the operation and help them understand the why!
Why is this so important?
2 million farms cover
America’s landscape1
About 99% Only 29% 62% of U.S.
of U.S. farms are of family farms have farm operators are over
operated by families2 transition plans in place2 the age of 551
1 2017 USDA Census
2 2016 US Farm succession plans and the process of transferring land ownership. Agriculture & Applied Economics Assoc. Annual Meeting
Only 30% of family-owned businesses
pass to the next generation
And even fewer (12%) to the third*
* Family Business Alliance
http://www.fbagr.org/index.php?option=com_content&view=article&id=117&Itemid=75
“Failing to plan is planning to fail” Primary reasons farm and ranch transition plans fail? ◦1. No current estate/succession plan ◦2. Inadequate estate/succession plan ◦3. Insufficient capitalization ◦4. Failure to prepare the next generation properly ◦5. Failure to communicate the why?
Components of the Business Succession Plan Establishing Goals and Objectives Family Involvement in the Process Identify Successors Estate Planning Contingency Planning Entity Structure and Taxes Business Valuation Exit Strategy Implement and Follow Up
Who has a transition plan?
Nebraska Intestacy Laws
Intestate Succession: Spouses & Children
Inheritance Situation Who Inherits Your Property
– If spouse, but no children or parents – Entire estate to spouse
– First $100,000 of the estate to spouse
– If spouse, and all children are of decedent
– 1/2 of the estate’s balance to spouse
and spouse
– Leftover split evenly among children
– If spouse, and some or none of the – 1/2 of the estate to spouse
decedent’s children are of the spouse – 1/2 of the estate split evenly among children
– If children, but no spouse – Entire estate split evenly among children
– First $100,000 of the estate to spouse
– If spouse and parent(s), but no children – 1/2 of the estate’s balance to spouse
– Leftover to parent(s)Estate Planning Goals – While Living Provide for management of assets in the event of disability or incapacity Provide instructions for healthcare decisions Protect assets from long term care costs
Estate Planning Goals – At Death Determine who gets what, how and when after death Maximize estate by reducing expenses and avoid delays Avoid family disputes Minimize estate taxes Provide liquidity
Planning All of Us Should Consider
Will
•Legal Document
– Takes effect at death
– State requirements vary
• Benefits
– Transfer of assets
– Names guardians
– Can establish trusts for beneficiariesDistributing Your Assets
Probate
Court-supervised distribution of assets
Advantages
◦ Distributes assets according to will
◦ Limits time to challenge will
◦ Limits time creditors can make claimsWills & Probate –Avoiding Probate
Can you avoid probate? Own property jointly with rights of
survivorship
Complete beneficiary designation
Yes, an estate plan can be designed to
control which assets pass through
forms for property such as IRAs,
probate, or to avoid probate. retirement plans, and life insurance
Transfer on death deeds
Make lifetime gifts
Use trustsTrusts -- What Is a Trust?
Legal entity that holds property Grantor
Parties to a trust: grantor, trustee, Trust
beneficiary Trust Property
Agreement
Trustee
Living trusts vs. testamentary trusts Manages trust property according to
trust agreement
Revocable trusts vs. irrevocable trusts Beneficiaries
Have rights to trust property
under terms of trust agreement
Control and manage an assetRevocable Trusts
Pros Cons
1. Avoid Probate 1. More Complex
2. Incapacity Planning and 2. More Work Upfront
Asset Management (funding the trust)
3. Protects Privacy 3. Higher Initial Cost
4. Reduces Administrative
Burden on Loved OnesTax Basics
Transfer taxes include:
§Federal gift tax - imposed on transfers you make during your life
§Federal estate tax - imposed on transfers made upon your death
§Federal generation-skipping transfer (GST) tax - imposed on transfers to individuals who are more
than one generation below you (e.g., grandchildren) both during your life and upon your death
§Nebraska Inheritance Tax
◦ Immediate relatives are subject to an inheritance tax of 1%
◦ Exemption amount $40,000.
◦ Remote relatives are subject to an inheritance tax of 13%.
◦ Exemption amount $15,000
◦ Other transferees are subject to an inheritance tax of 18%.
◦ Exemption amount $10,000Transfer Tax Basics Federal
2016 2018 2020
Top rate 40% 40% 40%
Gift and estate tax $5,490,000 $11,180,000 $11,580,000
exemption
equivalent
amount
GST tax exemption $5,490,000 $11,180,000 $11,580,000
The reversion to a $5 million exemption will occur on schedule on January 1, 2026 if Congress does not act.Taxable Estate The net assets subject to taxation equal the person’s total assets minus liabilities and minus the prescribed tax-deductible portion (charitable donations) of assets left behind by the deceased. Valuation Factors ◦ Lack of Control ◦ Lack of Marketability ◦ Special Use 2032A
Asset Valuation “Basis” Gifted Asset – donee retains donor’s basis Inherited Asset – recipient receives a step up in basis of the assets fair market value at the date of death. To determine if the sale of inherited/gifted property is taxable, you must first determine your basis in the property.
Farm/Ranch Succession Agreements
Buy Sell Agreement
◦Cross Purchase
◦Stock Redemption
Cash Rent or Lease Agreement Structure the terms prior
to the event taking place!
Operating Agreement
Employee BenefitsBuy Sell Agreement Purpose of the buy sell agreement is to create a plan that defines control, value and disposition of the company stock under defined triggering events Triggering Events May Include ◦ Death ◦ Disability ◦ Divorce ◦ Disagreement ◦ Bankruptcy ◦ Felony ◦ Retirement The valuation factor can vary for different triggering events
Cash rent or crop share agreement
Active Children: Inactive Children:
Right to farm the ground Right to an income stream
◦ For a period of years
Right to use and enjoy the property
◦ Or for lifetime
First right of refusal if active child does
Establish a cash rental rate or crop share % exercise right.
◦ Can be based on UNL market study
◦ Local FSA office information
◦ Predetermined by family members
First right of refusal/Put Option
◦ Predetermined price
◦ Tax assessed value
◦ Discount on market valueCommon family scenarios
Active Farming Non-Active Farming
Children Children
Can the operation support Is there a role for a non-
multiple families in the next active child? Concept of Fair
generation? Does everyone vs. Equal
know their role?
Active Farming Family Non-Family Members
Is there a brother or sister Is there a key person or
you farm with today? What property that the operation
are their plans? needs to retain? Are there
ex-family members that could
affect the operation?Building your team
Property /
casualty
agent
Banker / Real estate
lender agent
You and your
quarterback
Accountant Attorney
OthersLeave a Legacy A family owned or closely held business will endure or die depending upon on how effectively they plan for the future. Those who survive will have managed to re-create the energy and wonder that fueled the original entrepreneurial spirit.
Presented By:
Brandon Dirkschneider CFP® FSC, CLTC®
Brandon@insdm.com
(402) 672-8173You can also read
