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Legal Matters: Invest the time and effort to plan your farm’s future.

December 3, 2020

4 Min Read
An old barn with a stone silo and roof that is torn and broken
ESTATE PLANNING: A parent or grandparent’s continued ownership of farm real estate creates a substantial risk when aging or declining health increases the risk of his or her long-term care expenses, such as a nursing home, assisted living facility or other needs.Farm Progress

Your farm business, succession and estate plans should be periodically updated based on your current circumstances. However, the demands of farm work take precedence over long-term planning. The start of the new year is often the best time to evaluate your farm and personal financial situation and changes that need to be made in your farm planning.

You should, with your accountant’s assistance, annually prepare fair market value balance sheets for your limited liability company (the “company”) and each involved family member. The company balance sheet, combined with each family member’s interest in farm real estate, serves as the base for the estate plans and planning the transfer of farm equity from the parents to the successors.

Honest assessment

You would benefit from objectively assessing and discussing your farm’s present organization and how the duties, responsibilities and authorities have been assigned to the involved family members. This requires honest assessment of the strengths and weaknesses of each involved family member, including both the parents and the next generation.

In addition to mentoring the next generation, the parents should provide opportunities to assume broader authority and responsibilities, the opportunity to work directly with the farm’s professional advisers, and chances for continuing off-farm education. The successors must agree how they will work together with the parents and after the parents retire. A parent’s biggest success is if the next generation adopts the family’s sustaining quality values and becomes better farmers than their parents.

It is critical to identify any existing communication and conflicts that are adversely affecting relationships or effective management. Unresolved frustrations, rivalries, conflicts, communications problems and deficiencies in attitude, time commitment, performance or skills create dissatisfaction and, if not dealt with, evolve into conflicts. Resolving these issues requires substantial investment of time, openness and often compromise, and may require the guidance of a mediator.

Most succession plans begin with the transfer of limited ownership (“units”) in the company to the involved children. The parents intend to periodically transfer additional units to successors on an “as earned basis.” Most often, the intended transfers are not completed until the parents are pressured by the next generation. Sometimes, the initial or additional unit or other assets transfers are delayed for tax reasons, such as a “debt over basis” situation. However, there are creative solutions to such issues.

For example, an LLC’s operating agreement can be restructured to permit “profit interests,” giving the successors a greater share of the company’s profits and increased net worth; or a portion of the parents’ common units can be converted to preferred units with a fixed value and rate to return to, at least partially, freeze the value of their equity in the company.

The compensation paid to the successors should also be periodically reviewed to reflect each person’s time, effort and general contribution to farm work and management. Differences in successors’ contribution may also justify differences in their ultimate respective shares of farm equity. The ownership and equity in farm real estate acquired from the parents or purchased from third parties is most often divided equally among the involved children or, if more equitable, may alternately reflect their relative contribution to the farm’s success.

A buy-sell agreement should assure that the units in the company and all essential farm real estate remain owned by, or available to, the successors continuing the farm business and legacy. The parents’ estate plan must be coordinated with the options and obligations under the buy-sell agreement. The agreements and the estate plan must assure that the successors can acquire all assets necessary for their continuation of the farm at a price the farm can afford to pay.

Gifting assets

A parent or grandparent’s continued ownership of farm real estate creates a substantial risk when aging or declining health increases the risk of his or her long-term care expenses, such as a nursing home, assisted living facility or other long-term care needs. When the risks become substantial, immediate long-term care planning actions are needed, which may include gifting of farm assets or establishing a Medicaid trust or other irrevocable trust to protect those essential farm assets. Any such planning needs to be completed at least 60 months prior to the person’s qualification for Medicaid.

This column mentions only a few of the many important issues that require discussion and documentation to keep planning and related documents in line with your and your successor’s current personal and business goals and expectations. Invest the time and effort to plan your farm’s future.

Headshot of George Twohig

Twohig is a partner in the agricultural law firm of Twohig, Rietbrock, Schneider and Halbach. Call him at 920-849-4999.

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