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Smooth farm transitions, Part II: The peril of too many perks

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Family governance agreements can keep perks and pay from derailing your transition plan.

The farm owns the homes. The farm buys the owner's personal vehicles. The farm buys gas in the bulk tank and everyone fills up their personal vehicles. The farm owns the lake home. And the boat.

At first it was just good tax planning. But fast forward a couple of decades and these perks have multiplied and more generations are involved. Instead of one corporate-owned house, there are three. Instead of a couple of business-owned personal vehicles, there is a whole fleet.

One of the three sons wants to live in a nice house -- nicer than the farm can afford. Another spouse would like to remodel the old farmhouse but since it is a business asset, this must get approval from the other owners. Yet another family would just like windows that don’t let in rain.

The decisions bog down owner meetings. People can’t agree.  

Then there is the work. One of the sons wants to be actively involved in their children’s extracurricular activities at school. One of the three sons doesn’t have children and just likes to work as much as possible. The third son likes to take long winter vacations. Dad and mom don’t want to referee their grown children.

These scenarios are very common on family farms, and they can complicate a transition plan. Conflict around owner pay and perks is common in almost every transition plan we help with.

Many of the perks made perfectly good sense at one time and even created some great (legal) tax deductions. When the ownership circle is small with a sole proprietor, this often makes good sense.

But a transition plan must address these issues or there is a credible threat of family conflict.

The solution? Family Governance agreements can deal with these emotional issues as part of the transition plan. Here are three big areas to cover:

Compensation & Vacation

When a farm has few owners, wages and vacation time are often minimal. But once brothers begin to farm together it makes sense to base pay on skills and hours worked. Let’s be honest. Some skills are simply more valuable than others. Some people work harder than others. Some owners bring more value to the farm than others. These are hard conversations, but it is almost always better to have an agreement on compensation sooner than later.

This agreement is important as the senior generation begins to phase out. It’s best to have clear job duties for everyone, including those phasing out. Then try to match pay that is somewhat close to market rates. Also, a simple agreement on vacation should be addressed at this stage in the transition plan. This keeps everyone accountable and ensures the work will get done.

Personal Vehicles

At some point, many owners realize that owning personal vehicles within the farm business isn’t worth the business risk or the hassle. Many simply choose to pay a stipend to the owners for vehicles. If one owner wants to drive a beater truck they can, while another can choose to buy the latest and greatest. Many farms don’t cover personal vehicles at all.

Homes

The hardest issue is farm-owned homes. In the past, many years farms built homes on the main farm site. The office was in the home and in some cases employees were fed at the family table. Some homes are acquired along with a land purchase. It isn’t hard to end up owning more homes inside of the farm than anyone wants.  

The result is the farm owns personal homes of various ages, sizes, and quality. Over time these homes become a bone of contention as no one family has mental or physical ownership of the place they call home. Some homes may have strategic importance because they are connected to a feedlot, barn, or other farm property. It quickly gets messy.

We recommend, for the sake of peace, having homes owned outside of the farm business. There are often too many areas of conflict to make it worthwhile.

Splitting these assets off and into the hands of the owners might not always be clean or even possible. Sometimes property must stay with the farm. If that is the case, then solid agreements are the best alternative.

Some farms give each family a stipend for maintenance, or upgrades. This money can be saved for major remodels or something simple like flooring. Each family has discretion over when and how the money is spent. Also, a policy should be created to address which changes, above and beyond maintenance, need farm approval and which don’t. We encourage owners to give as broad of latitude as possible.

If the homes are privately owned outside of the farm but have strategic importance, a first right of refusal on a sale is worth considering. It allows the farm options to repurchase the home so there aren’t any surprises. Given the nature of livestock and manure management, having control over who lives next to your feedlot or dairy is something to keep an eye on.

Transition planning is not easy, and undefined perks and benefits make it harder. What once was good business tax planning can derail a transition plan. You may decide some perks should come to an end. Other perks just need a few guardrails to keep the peace.

Don’t let perks and pay derail your transition plan. Have the hard conversations today, when emotions aren’t high. It’s always the right choice for your transition plan.

Check out Part I of the series: Smooth farm transitions part one: Avoid stepping on toes

 

Tim Schaefer helps farm families navigate transition challenges.  Farm Futures readers are allowed one free 20 minute call where you can ask any transition planning question. Schedule your call by clicking here. Or you can email your question to [email protected]

 

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