Estate and succession planning
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:
- Part 1: Legacy Lost
- Part 2: Redefining tradition
- Part 3: Branching Out
- Part 4: A living legacy
There's a difference between estate and succession planning--and Rod Carter points out that the distinction isn't always understood.
"Estate planning is about developing strategies to reduce estate tax liability," said Carter, vice president of business consulting services at Northern California Farm Credit. "Succession planning ensures the business is carried on after the owner dies.
"It doesn't always occur to farmers that a comprehensive plan for transferring assets and business operations is needed. And, if the need is understood, people don't always know where to get help."
Frequently asked questions
In a family, who usually decides to get professional help with estate and succession plans?
It's about 50-50 between the older and younger generations. In some cases the 45- to 60-year-old "children" recognize the need, but sometimes it's parents in their 80s who want to retire. And, it's not unusual for these plans to also account for future participation by grandchildren in the agribusiness, making the planning a three-generation process that can span business operations of 100 years, or more.
What is a long-term capitalization strategy?
It's a way to begin moving responsibility, not just for running the business, but also moving assets to the younger generation. That way they can begin to grow their own portion of the business.
This can be gifting of stock. It can be extending partnerships interests or creating a limited liability company. It can be paying dividends through the business so younger members of the family have money to invest back into it. It can be as simple as following an installment purchase agreement for land, equipment or other business assets.
How long do strategies like this take?
These strategies almost always start later than they should. They are 10- to 20-year transition plans--in agriculture even longer because people tend to farm into their 80s or more.
How complicated are these plans?
They can be as simple as the junior members of the business buying some of the land on an installment contract from their parents, which accomplishes a couple of things. It freezes the value of the asset in the contract, builds equity and shifts the appreciation of the land to the younger members of the family. That approach has an estate tax planning facet because it reduces the size of the senior member's estate and begins a process of capitalization transfer.
Are there other easy approaches?
Some people, for example, might expand their operations by purchasing a quarter section of land next to them. But instead of buying it in the name of the farm, they'll buy it in the name of the younger members of the family.
Do estate and succession plans create discomfort for families?
Some people don't like talking about business transition, retirement, growing older, death taxes, trust, disability, life changes. All those things are unpleasant for most people to talk about. But there are families that are quite good about estate planning and begin communicating early, make time for planning and start training the junior generation when they're young.
How do families get started talking about these topics?
Well, I can tell you that Dad's birthday or over Mom's Thanksgiving turkey isn't the best time to bring these subjects up, yet these are often times when the whole family is together. The result usually is a food fight and nobody brings the subject up again for 20 or 30 years. Instead, we recommend a family meeting conducted by outside professionals who can help assure a positive outcome.
How much does this kind of planning cost?
The cost of estate and succession planning can range from $5,000 to $50,000 or more. It depends on the complexity of the agribusiness. But, for most farmers and ranchers we deal with, if they invested $5,000 in these plans, along with wills and living trusts, it would be money well spent. For some, that may be all they need.
For more information, visit norcalfc.com.