Gain insight into your succession plan from these reader questions
Q: We just had our first family meeting regarding succession planning. My wife’s parents are in their 60s and own two separate ranching operations. This all came about due to the possible change in the federal estate tax limit from $5 million each to $1 million at the end of 2012. Please help me understand what will happen in 2013 and beyond.
A: Nobody knows what the government will do in regards to the estate tax for 2013 and beyond. Families should plan based on the current law and remain flexible as things change. It is important to implement a plan that mitigates the estate tax, yet the plan should be based on specific goals for succession, not jeopardize the financial security of the principals (your in-laws), not grant ownership in the operation to inactive heirs, and remain dynamic enough to be flexible when changes come in the future.
Q: Several neighbors have gifted land to their kids, anticipating tax law changes. That seems like a really big step; is it the right thing to do?
A: Many have talked about gifting to the next generation based on the current estate tax exclusion amount, but we have not seen evidence to support this. It is a big step. Giving land away might jeopardize the operation, grant control to others and undermine the financial security of the principals. There are ways to structure the gift that might help to mitigate the risk, and farm owners should be certain their advisers understand the nuances of their family farming operation.
Q: We’re considering an LLC for our two ranching operations. Should we set up separate entities, or is one enough?
A: It might be appropriate to set up four entities—one for each operation and one for each piece of land. This allows each operation and the land for each operation to be managed separately. Then ownership can be transferred separately from the land. Conversely, the land can be divided among heirs. In this case, the owner/managers would pay rent to the land LLC; the operation and land would be managed separately. An LLC can be split into shares (memberships) and distributed (gifted) gradually; however, the value of each share diminishes due to a lack of marketability and control. Shares might be discounted by as much as 30% to 35%. In estate tax planning, these
discounts can make a big difference.
Q: My parents, siblings and husband all work in the operation. I worry that increasing regulations will void any planning we do. Is there a difference in planning for succession in states with less regulation versus states with more?
A: There is no difference in the probability of a satisfactory outcome based on a state’s regulatory climate. Succession is affected by everything, so hanging success or failure on a single issue is almost impossible. Establish a succession plan; without one, the odds are against you. The process will compel the family to discuss threats to the operation—regulations, environmental issues, labor, markets—and, more importantly, the compromises necessary to realize your dreams. There are gainful opportunities for any operation that masters the challenges of an unfriendly farm environment and continues to grow to feed a hungry population.
Seneca, the Roman philosopher, once said, "A gem cannot be polished without friction, nor a man perfected without trials." Like any worthwhile endeavor, leaving a legacy might be ripe with challenge yet blessed with opportunity. Through the years, we’ve heard from many farmers who are working to polish their succession plans. Below are some of our readers’ top questions.
- Mid-November 2012