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Thursday, January 31, 2013

Estate Tax Stability Means Easier Farm Succession Planning


The financial agreement between Congress and the White House at the outset of the year solved many federal financial issues, and helped provide some degree of certainty for the federal estate tax.  While the result was not elimination of the tax that agriculture had lobbied for, it imposes a 40% tax on assets over $5 million, versus the 55% tax on assets over $1 million, which was set to go into effect at the beginning of the year.  Uncertainty complicates farm succession planning, but the permanent rate now in place, which is indexed to inflation, will help families plan.  So, where do we begin?


Twelve step programs have become famous for success.  And a trio of ag economists from Kansas State and Oklahoma State Universities  has developed a 12-step program for farm succession planning.  Their initial advice is that “this is not an easy process.” There is a lot of planning, preparation, and communication that goes into a successful farm succession plan.


Step 1

Identify core values of what you and your family believe.  What do you desire to achieve?  What are you willing to sacrifice in order to reach your goals?  In the end, what do you see happening?  How are family members treated and served by the succession plan and what should happen to the assets of the operation and the enterprise?


Step 2

Everyone should identify what they want to happen when a transition of the operation takes place and what that person wants, needs, hopes, and fears that will happen during the transition process.


Step 3

Everyone should establish a vision and mission for the enterprise as well as objectives and goals.  There will likely be conflict among the family members and those need to be addressed and resolved as you move forward with the planning process.


Step 4

Human resources are the strength of the operation, but also can be weaknesses.  The ag economists say it is important to identify the strengths and weaknesses of all involved in the farm transition and put them in positions that will allow them to thrive.  Many transitions can fail without good communication among those involved, and adjustments have to be made.


Step 5

Those in charge may have a challenge if the senior generation wants to drive the bus.  The successor needs to make decisions, even if there are growing pains in doing so. Each stakeholder needs to know where they stand in the organization and see who is above and below them and where lines of authority are.


Step 6

Financial issues must be addressed from the outset with the leadership knowing whether the operation is on solid footing and efficient.  Without knowing that, it is not possible to know how many families the operation can support.  Financial feasibility is key to success, and every operation must be able to financially survive death, disability, and divorce of the key managers.


Step 7

A resource inventory is also a necessity to help the management know if the transition can work.  Those include real estate, improvements, equipment, human resources, and community services with a focus on whether they all are working together.  The senior generation may hold all of the assets, but that means the business may not survive upon their passing.


Step 8

Identify the strengths, weaknesses, opportunities, and threats for the operation.  Find out what can be done better than others, what you should avoid, what advantages are available, and what obstacles may be in the path to success.


Step 9

Create major financial reports for the operation, including commodity production budgets, cash flows, balance sheets, sample income statements and others to determine where issues need to be addressed.  Seek assistance from experts in their evaluation.  Determine where you are on the gauge, where you want to be and how you can get there.



Step 10

Create a business plan for the operation that will show expansion and planning with succession from one generation to the next.  This will communicate your operation to lenders and demonstrate your stability over time.


Step 11

Estate planning is a must in any farm succession plan, but not just for the retiring generation.  It is a requirement for all generations because those plans must include funding provisions and decisions about asset allocation.  Those also include the legal structure of the operation and the comfort of knowing heirs will not be fighting over the estate.


Step 12

The plan must be put into action with a timeline and points at which goals will be achieved.  Transitions will happen, whether desired or not, and a good implementation plan will assure everyone that the succession plan is being managed, instead of being out of control, and unable to allow new generations to join the organization.




Farm succession planning can be a successful venture but it takes good communication among all involved and common goals.  Consultants can assist in the development of a plan, but the family members must have all of their family desires known to everyone before valuable resources are spent on consultants.

Posted by Stu Ellis on 01/31 at 10:49 PM | Permalink

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