Editor’s note: This is the first story in a series on ranch and farm estate planning.
By Robert Waggener
Rancher Keith Bales, who turned 75 this March, admits he’s slowing down a bit, but he still works 50 hours a week during the busy spring, summer and fall months.
Many aging ranchers and farmers across the country can relate to Bales, as they’d rather be working cattle or the fields instead of moving into town to enjoy a more traditional retirement.
That doesn’t mean Bales isn’t thinking about the next generation for this operation. But that kind of succession conversation actually started with his parents in the 1970s, after he returned to the ranch following college and a stint in the Army.
“My folks knew I loved to ranch, and one day we started having open, honest discussions about how to plan for the future,” says Bales, whose family has ranched on the Wyoming-Montana border since the early 1900s. “You can’t take a ranch with you. So, if you want to help the next generation continue, it’s important to take the necessary steps to have a seamless transfer.”
Bales recalls being asked by his parents whether he wanted to keep ranching. “When I told them a definitive ‘yes,’ we started trying to figure out how to make it work.”
Nearly five decades later, Bales and his wife, Christl, have been having similar discussions with one of their sons, Michael — who, like his father, loves the cowboy lifestyle and is equally passionate about making sound business decisions and running a sustainable operation.
“Like my parents, I would very much like to have the ranch stay in our family, and I am very happy that Michael enjoys ranching. In fact, he’s wanted to ranch since he was a young boy. It’s been his dream,” Bales says.
Structure and succession
Among the key parts of succession planning are one involving the financial and tax strategies that can keep an operation viable and prevent onerous inheritance taxes. Another is the fairness challenge of how the operation itself will go on, and how the business will look in the future.
For Bales, the financial base of succession planning has involved using C and S corporations, living trusts and a technique called generation-skipping transfer (see related story). And in that time, the family has been investing in the business.
But more important, Bales says that he and his family are continually taking steps to improve every aspect of ranch management, from water developments and planned grazing to creating new livestock marketing opportunities.
“I would like to think that I will leave the ranch in better shape than when I got it, and I am sure that Michael will be able to say that, too,” Bales says.
He is confident that a combination of sound ranch management coupled with well-thought-out succession planning will help keep the ranch in the family for years to come.
“It’s tough enough to keep a ranch running without having to buy it back from the federal government through inheritance taxes, and that’s why planning is so important,” Bales says. “By doing estate planning and having honest discussions with parents, siblings and children, that gives all sides a better perspective of what everyone has in mind for the future.”
He adds, “At this point in time, having a ranch for more than 110 years in one family is pretty rare, and we are happy that Michael and his wife, Heather, want to be here.”
The road to succession
When Bales shared his love of ranching with his parents back in the 1970s, the real work began.
That conversation led them to reach out to Sheridan, Wyo., attorney Henry Burgess, who had an agriculture background and was in the process of helping his own family with ranch estate planning. Burgess, who has since died, was well-versed on key issues and tactics of estate planning.
“When it comes to ranch and farm succession, you need someone who is knowledgeable and who will give good advice,” Bales says. “Mr. Burgess had a ranch, and he and his family were doing the very same thing that we wanted to do. He was up on all the different options, and ins and outs. That, coupled with our family being able to visit, made me feel good about what we were trying to accomplish.”
After a series of family meetings and discussions with their attorney, the Bales family decided to set their ranch up as a C corporation. This allowed Bales’ parents to start gifting and selling shares to family members to avoid or lower inheritance taxes.
“Back then, the inheritance tax was very onerous,” Bales notes. “The valuation of ranchland has traditionally been much higher than what a ranch would cash-flow, and it was virtually impossible to gift acres to reduce your inheritance tax.”
Bales Ranch Inc. owns about 11,000 deeded acres, along with livestock, machinery, homes for three families and outbuildings. Private, state and Bureau of Land Management-leased lands are an integral part of the operation.
“All sales and purchases run through the corporation,” says Bales, who notes that members of the family each own a certain percentage of shares, whether they work on the ranch or not.
In turn, family members who are employed either full time or part time, along with a hired hand, are paid a salary and provided housing.
“C corporations work well if the ranch has a stable history, and there is no intention of selling out; but if you do want to sell your ranch, this kind of corporation is not good because the corporation is taxed on the proceeds of the sale, and then the shareholders are also taxed,” Bales says. “But back in the ’70s, since there was no intention of selling our ranch, our family and the attorney both felt this was the best way to go.”
On the financial side, keeping up with changing rules is important. The new tax law, for example, has expanded the exemption on estates, reducing the burden of the estate tax. It does have a sunset provision, but for now offers more freedom.
The family’s election of a C corporation made sense back in the 1970s, but a move to acquire more land called for a different approach — putting 2,500 acres of deeded land under an S corporation.
Choosing the right financial tools
Bales says his family has worked hard to make their ranch on the Wyoming-Montana border profitable, and those efforts paid off in 2016 when son Michael and daughter-in-law Heather were able to buy 2,500 acres of rangeland.
“Our family had been leasing that land since the 1970s, and it had become an integral part of our ranching operation,” Bales says. “It adjoins our existing deeded land plus the other land we were leasing.”
When the family that owned the land decided they wanted to sell, Bales notes, “We knew we had to make an effort to acquire it to make our ranch sustainable.”
The land was listed when cattle prices were near record-highs — plus, there was another bidder. In combination, that drove up the cost.
“We knew we couldn’t pay the land off with the amount of cattle this parcel could support, but by combining it with our other holdings, it became feasible,” he says.
Keith and Christl Bales bought a small percentage of the land to help their son and daughter-in-law secure financing.
And after consulting with their attorney-accountant team, the couple agreed to put the land in an S corporation, which allows the corporation to pass income directly to shareholders and avoid double taxation — unlike a C corporation.
“By doing this, Michael and Heather have a larger financial interest in the ranch,” says Bales. He emphasizes that the couple are already planning for the future as they have two children who also love the ranch lifestyle: Chase, 14, and McKena, 12.
Adds Heather: “So many of our business decisions are not only based on how they will impact the ranch today, but also our kids and their future in the ranch.”
Looking at the entire ranching operation, Bales continues, “We would probably be ahead to have all of the land in an S corp. and all of the cattle and machinery in a C corp. But that’s just personally speaking. Each ranch and each farm have circumstances that are very different.”
And that is why Bales says it’s vitally important to find an attorney and an accountant versed in running a ranch or farm business, and versed in agricultural estate planning as well.
Family and fairness
One of the issues that many farm and ranch families face with estate planning is how to treat children fairly. Notably: How do you set things up when one child is employed on the farm or ranch and represents the next generation, while another child has chosen a different profession?
That is one of the questions facing Keith and Christl Bales. Their son, Michael, is a full-time ranch employee and will one day likely oversee the entire operation with his wife, Heather. Their other son, Brian, chose to live in Sheridan, Wyo., where he works as an electrician.
“One of the biggest drawbacks about our ranch is the fact that it’s so isolated,” says Keith Bales, noting that Sheridan, the closest town with significant amenities, is a three-hour round trip drive in good weather, and most of that is on shale roads that chew up tires.
Bales realizes that ranch and farm work (along with isolation and the related issues this brings, including schooling) isn’t for everyone. But they wanted to treat their sons equally, regardless of what profession they chose and where they wanted to live.
They addressed this, in part, by establishing trusts many years ago. These documents state that for each year a son works on the ranch, he will inherit 5% of the ranch shares.
Since this would potentially allow one son to inherit a majority interest in the ranch, Bales says that the trusts also state that other assets, including investments, would go to the other son to make the inheritance as equal as possible.
Another technique they used for ranch transfer is called generation-skipping. When his father died, Bales says he was supposed to inherit his father’s shares in the ranch. Instead, he and Christl chose to have those shares split equally between both of their sons.
“This allowed us to keep the value of our estate down while gifting the shares to our sons, without going over the threshold for the death tax. This really helped us to keep the ranch in our family,” Bales says.
He adds: “We’ve tried hard as a family to steer the estate in the direction we want it to go, and so far it has worked for everyone. You need to sit down with a good attorney, do some thinking, do some planning and do some looking ahead.”
Waggener writes from Laramie, Wyo.