Handing Down the Family Farm: Redefining tradition

Issue Date: June 14, 2006

By Kate Campbell
Assistant Editor

Walter Deardorff with his son, Rusty.

Walter Deardorff, like his father before him, has farmed his entire life. And he hopes his son, Rusty, will be able to continue to do the same. At age 72, Walter says he's starting to slow down and he's giving more thought to what will happen to his walnut ranch when he's gone.

These days he can only do tractor work a few days a week, and he's leaving more of the operating details for the family's 250 acres of walnut orchards in Stanislaus County to his son.

Walking through a newly planted almond orchard, Deardorff talked recently about his family's values and farming experience. He stopped for a moment to check on how his granddaughters, Kathleen, 12, and Jenna, 11, were doing with pruning the young trees.

Family farmers at a crossroads

The largest exchange of wealth in world history is occurring as the aging make final decisions about their legacy. But, with the possible return of the death tax and the changing future of farming in California, which road should be taken? Ag Alert® delves more deeply into this important and timely topic:

The girls, who live on the ranch with their parents, cut away branches inside the trees to open them up to sunlight and air, explaining that this stimulates growth and improves eventual yields.

Deardorff, who has served for more than 20 years on the California Walnut Commission and the Walnut Marketing Board, said he believes working on the farm from an early age is "wonderful for character development." And Kathleen and Jenna say they enjoy the extra cash they earn from their work.

Like many others, the Deardorffs have followed the time-honored tradition of handing down the family farm from father to son. But as Walter Deardorff approaches retirement, things have changed--in the world, in California agriculture and within his own family.

On the horizon for the Deardorffs is the prospect of passing down the family farm to women and the need to prepare them to take on the role of farmers, if that is what the family agrees is the right decision.

In an analysis of data from the 2002 census of agriculture, researchers found that less than 10 percent of the nation's 2.1 million farms showed evidence of having a plan for handing down the farm to the next generation. They also found that when a plan did exist, only about 6 percent of those farms would be passed down to female family members.

With the baby boom generation nearing retirement and their own parents' lives coming to an end, the largest transfer of wealth in the history of the world is under way. In the coming decade, experts say that an estimated $26 trillion in assets will change hands in the United States.

In California that means the most expensive agricultural land in the world will be a large part of those assets changing hands. This will take place at a time when heavy regulations, skyrocketing operating costs, urban encroachment and uncertainties about the death tax are all big concerns.

Walter Deardorff points out that there has never been another time in history when government policies and regulations have had greater influence on personal wealth--and the viability of family businesses, including farms and ranches.

"Hanging in the balance of this massive transfer of wealth are the agricultural assets the nation depends on for its food supply," he said.

"With all these complexities and the uncertain environment for estate planning, I can't afford to get set in my ways--not if I want this family farming business to survive. And I can't quit working if I want to provide for myself and my wife."

Putting a plan in place
The Deardorffs have formed a family limited partnership and Rusty, along with his sister, Heather, are beginning to build equity in the company through yearly gifting. They also regularly consult with estate and tax planning experts because the family believes handing down the farm is an active responsibility that requires everyone's involvement and ongoing attention.

"With my dad, his estate plan was that everything would be divided equally between me and my sister when he died," Walter Deardorff explained. "That wasn't the best thing to do for the farm, but that was my father's decision. I had to borrow to hang on to the farm and I'll finally pay off the loans this year.

"I think it's only right and proper that Rusty, who lives here and works on the farm, should be able to acquire the family business when the time comes. Like my father, I have two children--a son and a daughter.

"I can't just cut off my daughter, Heather, from the estate. She lives in Michigan and is president of a community bank. She did that on her own and I'm proud of her, but at the same time she's not working on the farm, helping build the business here."

Rusty Deardorff, 44, says that even though his father is an advocate of estate planning and wants to see the family's farming business continue, it can be a difficult subject to discuss.

"Let's face it," he said, "sitting down and talking with my dad about these things isn't easy. It's about control and not wanting to let go. It's about doing things differently than past generations and keeping up with all the laws and regulations. It's a lot of work, complicated and, at times, emotionally draining. And then there are my girls.

"As a farmer, I enjoy my life," he said. "But I don't want to find that just as I'm about to retire, I inherit the family farming business and face a mountain of debt in order to hang on to what my father, my grandfather and I have built. It should be mine.

"My grandfather passed on the farm the old, traditional way and my dad paid the price," said Rusty Deardorff, who is a director of the Stanislaus County Farm Bureau. "Things don't have to be like that."

'It's a conundrum'
When Walter Deardorff's parents died within months of each other in 1991, neither real estate prices nor urban pressure on rural land were anywhere near what they are today, he said.

Sitting at his kitchen table, Deardorff pulled out a local newspaper and pointed to a real estate ad for a nearby farm. The asking price for the 50-acre property was $3.5 million. He worries that the appraised value of his own farm would mean a death tax bill so high and out of proportion to the income the farm generates that his son won't be able to continue.

"Fortunately, my father was very conservative and we had some liquid assets that helped us hang on to the homestead," Deardorff said. "But farm income these days isn't as great as it once was. The current farm economy isn't a situation where you can accumulate a lot of wealth. Without liquid assets, my son will have to borrow or sell."

Partly in recognition that exorbitant estate taxes on farm and ranch assets hobble and break farm businesses, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001. There also was an understanding that farm and ranch real estate had substantially appreciated in both dollar and social value through the years, particularly in California.

While the tax relief was welcome, the act also included a sunset provision that will throw the estate tax laws back to the levels they were a decade ago. This compounds the uncertainties in estate planning for the Deardorffs and many other California farm families.

With the death tax sunset in 2010 approaching, Deardorff says his is not the only farm family worrying that death taxes will once again mount and financially swamp their operation.

Although the U.S. House of Representatives voted last year to repeal the sunset provision in the tax act, a similar measure in the Senate failed to pass last week.

Agricultural leaders stress repeal is essential if farmers and ranchers are to get permanent relief from death taxes. They're counting on Congress to take the issue up again and make elimination of the death tax permanent before the sunset arrives at the end of 2010. .

"Estate taxes are going to be our downfall, if something isn't done about it," Deardorff said as he scanned the horizon from the patio of his hilltop home. "It's hard to talk about estate planning and succession planning when you look at economic realities. If we want to compete, we have to get bigger and more vertically integrated. That means taking on more debt.

"If we want to hang on to what we have, then we have to save harder for the tax bite. Where are we going to get more money to spend both ways? The cash flow isn't there. I don't know how to solve this transition problem. It's a conundrum."

Solving estate tax issues
"While there are days when estate planning probably seems like a puzzle, in fact the Deardorffs, like many of the farming and ranching families we work with, have taken significant steps to mitigate the tax issues related to the transfer of assets," said Scott Beattie, a partner with Calone Law Group in Stockton and a state-certified specialist in estate planning, trust and probate law. "Walter and Rusty know that if they don't take these steps, they'll be facing more than a conundrum. They'll be facing a potential disaster."

Beattie said one of the best approaches to estate planning is to structure asset holdings so that the current owner does not own 100 percent of those assets at death. The shift in ownership is done gradually and methodically over time.

"That's what a family limited partnership allows you to do," Beattie explained. "It allows you to own assets, such as real estate, in a way that splits the equity ownership with other family members."

Sharing the equity before death can be tricky, Beattie said.

"Some people have planned for sufficient cash flow as the assets are transferred and retain a position as a general partner.

"The fear of giving up control, however, isn't something we see only in agriculture. It can be an issue in any family. With assets like farms and ranches, they often represent not only financial security, but also personal identity, family history and cultural values.

"And for the World War II generation, many have seen depressions and wars and they know the value of security owning the land and in having that asset," Beattie said.

"Making the transition in ownership involves a level of trust with family members. The family dynamics play into these plans quite a bit. And, as often as not, these estate plans involve passing assets on from mother to child, because women often live longer than men and much estate planning is done by widows."

Beattie said that once clients decide that a comprehensive estate plan is needed, their comfort level with the process increases as they gain understanding of the legal aspects and move through the steps of creating the plan.

"That's why people need to start the planning process early," Beattie said. "It's not a last-minute thing. And you don't do estate planning all at once and get it over with. It's a multiyear project, not just because of the psychological issues, but because of the tax issues as well. For example, a gifting plan has yearly limits. These are the kinds of things that have to be decided and executed over time."

Attorney, accountant, insurance broker and financial planner must work closely together because no one person has every piece of the puzzle, he said. To pull together all of the pieces, it's common for all these professionals to sit down with the farmer or rancher and develop an estate plan that's tailored to a family's specific situation.

"With the Deardorffs, there's a level of sophistication they've acquired over a long period of time that allows them to achieve a lot in the planning process," Beattie said. "They've done the extra work and they've kept at their plan with a certain amount of patience."

When asked what he wants for his children and grandchildren, Walter Deardorff said he wants them to be happy and successful, and he's willing to keep working if it will help accomplish these goals.

But he said he and his wife, Janet, would like to travel a little, too--perhaps take a trip down the Mississippi River and see the plantations … and maybe find a delta blues joint to sit for a minute and tap their toes.

(Kate Campbell is a reporter for Ag Alert. She may be contacted at kcampbell@cfbf.com.)

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