Estate Planning: Set the Next Generation Up Right
Published on Mon, 10/25/2021 - 2:21pm
Estate Planning: Set the Next Generation Up Right.
By Jacilyn Krymowski.
Estate planning, like the entire succession process, can be an extremely challenging, confusing and emotional task on beef operations. Because agricultural operations and family-owned businesses are so unique with lots of different assets and ownership, it can be incredibly easy to get lost in the weeds and overlook key details. Then when tragedy strikes or the time comes to pass on the farm to those next in line, it may be too late to straighten things out in a cost-effective manner. What’s more, because operations are all so unique, there is no one size fits all approach that a ranch family can follow.
As difficult as it may be, planning for the ranch’s future – along with the many different possible outcomes that may entail – needs to start sooner rather than later. This type of planning cannot be done alone or without some knowledge. A successful and efficient transition requires a conscious team effort with realistic expectations.
What’s really in your business?
Like any other business, ranches deserve to have a formalized and legal plan of succession. But they are not without some unique, industry-specific obstacles to families and even legal experts.
One of the things that experts say makes agriculture estate tricky is the wide variety of assets. This is especially difficult considering a lot of them are not liquid. In an article for HG.org, David Purcell of Your Estate Matters, LLC notes that farms and ranches tend to run a risk for losing valuable assets upon the death of an owner because – despite including high-value things like land, livestock and equipment – these items are often very heavily in debt. When estate taxes come into play, due to lack of liquidity to pay them, said items are forced to be sold to cover them.
Proper estate planning done well in advance is an important measure to avoid getting entangled in these “traps.” According to one Department of Agriculture survey, while nearly 70% of family operations said they planned to continue into the next generation only 23% had a succession plan in place to make that happen.
Something little considered is that future generations have succession obstacles that those in the past didn’t have to face. For example, land now holds significantly more value than it did decades ago. Likewise, the cost of equipment, technology and running a business have all increased – but many of these things have tricky details like depreciation that must be factored in. Additionally, succession for a ranching business has both assets and operations. Both of these need to be accounted for in different ways.
Ask the right questions
Given the complex nature of ranch assets and operations, the first step in the succession process is to know exactly what is currently owned and who owns it. Insurance policies, market values, bank accounts and tax statements can all help put together a pretty good snapshot of what the whole operation looks like.
The second part is a bit more difficult; sorting out where you want to be included in the farm succession. This can get very complicated when multiple siblings or in-laws are involved in the operation. This leaves opportunities for splitting up some of the assets as opposed to passing on the whole business.
What you want to do – and what your successors want – shouldn’t be solely made with passion. It should be made with the state and nature of the business as it stands, plus some legal counsel.
The plan of succession decided on might require some active changes to the ranch’s structure. For example, a ranch that is under a family partnership will be much easier to pass down as a cohesive operation as opposed to one that is privately held with the intent to be split into different assets.
Another question to factor in is the retirement of older generations. Are there adequate funds for full retirement? Or will they need to still take a cut of business income? In some cases, it is best to have children formally “buy-in” to the operation or lease-to-own land and cattle.
Balancing fairness and reality is an important balance to keep in mind – planning out succession can be emotional and force some tough decisions. You want to be considerate but also realistic about what you are providing to your heirs. But the best decision may not break down to everyone getting an equal slice of the pie.
On that same note, you also want to leave some wiggle room for uncertainty in the future. This looks includes leaving a way out for your heirs if the business goes bankrupt, they end up not wanting to continue the business or have a desire to downsize.
Finally, be sure to take inventory of what legal documents and entities you currently have in possession. This includes your will, trusts and life insurance policies and, as you start planning or even replanning your ranch’s succession, updating them as needed.
Dig into your resources
When estate planning for any agricultural business, you’ll want to make sure you’re leaning on reliable sources to avoid some costly mistakes.
Certain details about succession will vary according to state, so you will want to work with someone local to you when putting together legal documents. However, some of the background work can be done on your own to save some additional costs.
State extension offices often have some resources, online tools, and seminars to help you get some education on agricultural estate planning relative to your region. They can also help you find reliable attorneys that can help you navigate the tricky details.
Every ranch generation, putting in their years of sweat, equity, and hard work, must ultimately come to end. The passing of the torch is a bittersweet experience, one that touches many people. Fortunately, the process does not need to be impossible or overwhelming. But a smooth transition doesn’t happen by accident. Rather, it is the result of multiple people having an open line of communication and being savvy about their legal resources.