The nation’s farms are small businesses, often operated by a few key individuals. That means the success of the farm is tied to those people, which makes it critical that plans are in place to ensure the farm’s continued operation, should something happen to one of them.
Farm Futures has regularly written about succession planning, budgeting, landlords, crop marketing and the other aspects of farming. All of those are important, but so is preparing for the unexpected in the farm’s corporate office — typically, the family home.
The Lursen family in north-central Iowa experienced firsthand the need for planning when tragedy struck. Quick action on advice from a number of professionals kept the farm running after patriarch Larry died in 2011.
The Lursen survival story began in 2005 when Larry spent two weeks in New Orleans to help that area rebuild after Hurricane Katrina. Shortly after his return to Iowa, he became sick and was later diagnosed with lung cancer.
Radiation removed the cancer, but the lung damage from the treatments caused heart failure. That left his wife, Monica, and two adult sons to run the farm.
Any family loss is tragic, but good planning helped the farm move forward. The planning that led to that success included Monica hiring an attorney before her husband’s death. The lawyer set up a transition plan that kept all aspects of the farm within the family and prevented a trip through probate court.
Before and after Larry’s death, she worked with an investment adviser and a farm financial strategist to ensure the finances were in order.
“One of the things we did right was surround ourselves with pretty awesome professional guidance long before Larry’s death,” she says.
In addition to the transition plan, some of the farmland was placed into a limited liability company to benefit Larry’s sister, who co-owned it. The remaining acreage was put into a trust for the future, transitioning the land to sons Christopher and Patrick. Also, the farm equipment and operating funds may be put into an LLC, which will later be transferred to the sons. Before Larry’s death, he and Monica had wills drawn up that detailed disposition of the remaining assets.
“I felt like I had a pretty clear path and a pretty clear goal, both before and after Larry’s death,” says Monica. In reference to the financial adviser, “we had known him for a long time and had turned to him a number of times before Larry’s death.”
As Larry’s health declined, Monica apprised lenders and landlords of the situation and assured them the farm would continue. As a result, there were no disruptions in the business.
Since then, the farm has been operated by her and her sons, and has included an additional 300 acres nearby that came up for sale after Larry passed away. While Christopher works off the farm for Case/IH, he makes time to plant, harvest and market the crops. Patrick manages all the daily aspects of the farm operation and his two carwashes, plus he operates the family trucking business. Monica, a registered dietitian by training, oversees the operations, does the books and works with the lenders and landlords.
Expect best, plan for worst
Transition planning has been a common theme in farm conversations for years, but the situation with the Lursens illustrates that farms need to be prepared for tragedies. That is where Iowa State University’s Kelvin Leibold and other farm planners come in by helping farms prepare for the unexpected. Or as Monica says, “Expect the best, plan for the worst.”
The preparations establish frameworks for such things as who will run the farm, handling of debt obligations and working with landlords to ensure continuation of farmland rentals. The planning applies to more than the death of a family member or partner. Divorce, disability and departure of a partner also must be considered when creating operating agreements.
To start that process, Leibold says farms need to first determine the goals of the business or estate plan. Who do you want to take over the farm — the kids, the remaining partners or a third party? Once that is determined, then the distribution of responsibilities and assets, plus establishing pathways for continued operation, can be laid out.
“Currently, people have been looking at putting assets into an LLC and then giving out units. So one unit equals one vote,” Leibold says. “There are a variety of other types of entities, such as limited partnerships or S corporations, that could be used as well.”
These plans have operating agreements that spell out procedures for transferring ownership.
“These all impact the ability of transferring ownership and impact how profits are distributed,” he says.
LLCs are flexible, as the operating agreement defines each member or manager’s rights, powers and entitlements. The agreement among the involved parties spells out the rules that run the company, and the rules can later be amended by the company unit holders.
This protects surviving family members and partners in the farm in the event one or more partners die, depart or become disabled.
Leibold tells one scenario in which a remaining partner assumes that the death of the farm’s partner nullifies the partnership and allows him to take over the farm and push out the deceased’s family. A properly designed operating agreement would protect the surviving spouse and children by retaining their ownership in the farm operation.
The disability of a partner or family member can be particularly difficult.
“Disability is a unique thing for agriculture. First of all, it is difficult to buy disability insurance because the premiums are high, as we are in a high-risk business,” says Liebold.
It is not uncommon, Leibold says, for the remaining partner or partners to push out the disabled one, because he cannot perform his share of the work.
“There are not many strategies to provide him much relief,” he says.
One means of relief is designing the operating agreement so that the remaining partners will buy out the disabled one, which would at least provide financial support.
In that instance, Leibold says the wording in the operating agreement is critical, particularly with the words “will” and “may.” A clause that says “will buyout” is an instruction that protects the affected partner, while “may buy out” is vague and gives the remaining partner or partners the option of either buying out the share or not.
Resolving debt is also tricky. If a partner is bought out, forced out, or leaves on his or her own, how will the remaining debt be distributed? Will the departed partner be assigned his or her share, or will it stay with the farm?
All of those issues need to be spelled out in the agreement.
Divorce can be difficult too in that the departing spouse may want some of the farm’s physical assets. Which might be doable, but again will debt or shares of the farm go with the assets? Again, Leibold says such events should be anticipated when designing the operating agreement.
One of Leibold’s key rules is: “I never put together a plan without a plan to take it apart if the plan fails.”
In other words, design an exit strategy.