Succession planning not easy, but yields a lifetime of results
If you are in the business of succession planning, "instant gratification" is not part of your vocabulary. Farm Journal succession planning expert Kevin Spafford is fond of saying, "It’s easy to talk about doing something; action takes commitment."
Chet and Lori Esther of Beardstown, Ill., committed to their family farm legacy three years ago when they signed up as a case study family in the Farm Journal Legacy Project. The Esthers are nearly finished with the transition of their multiple-entity Illinois operation to sons Ryan and Chad. Top Producer has been there from the start, chronicling the journey and watching as the family worked through the challenges.
It took three years of decisions and meetings, some stressful and uncomfortable, but the family believes they are better for it. "Maybe not all families are like us, but it seems like to make big decisions or to get something done takes handholding, and I think most farmers are that way," Chet says.
Here’s a recap of what the Esthers have accomplished as part of the Farm Journal Legacy Project.
Start the Plan. Chet and Lori were very clear about their objectives. Financial security is critical to their succession plan, and key to that has been the transfer of land and assets so they can live comfortably in retirement. Working with their Legacy Project planning team, the Esthers:
- accurately analyzed their retirement income and expenses, particularly the noncash benefits that they’ve enjoyed as farm owners.
- reduced their debt, eventually eliminating it.
- planned for an emergency with a contingency fund for unforeseen expenses.
- budgeted for other choice obligations, such as travel, education and charitable intentions.
- created an estate plan, mitigating their tax burden, which maximizes spousal support and protects the operation in case of the premature death of Chet or Lori.
An accurate budget and detailed cash flow analysis have helped the Esthers make good decisions so far, and they are finalizing documents with their attorney and accountant. Annual reviews have kept the entire family on track.
After months of planning and conversation, the family, their attorney and their Legacy Project planning team settled on a multigenerational trust known as a dynasty trust. The 2010 Tax Relief Act (set to expire this month), made it possible to fund a $5 million trust without incurring a gift tax bill. It raised the exemptions for the gift tax and the generation-skipping tax, a levy that is applied when assets are transferred to relatives who are two or more generations below the donor.
"Succession planning is never a once-and-done event," Spafford says. Common family events such as buying or selling an asset, assuming debt, birth, death, illness and unforeseen calamity affect financial security and call for updates.
The Esther family succession plan included transferring land lease agreements from Chet to his sons. Currently, Chet’s EFFCO operation leases about 1,000 acres from Chet’s brother, Joe. Two years ago, Chet and Joe transferred the lease agreement from EFFCO to Esther Farms.
Flexible Transfers. Allowing Esther Farms to assume land lease renewals from EFFCO reduces the size of Chet and Lori’s estate, but this is not an immediate transfer. The plan establishes a five-year transition wherein Esther Farms assumes all of the leases and equipment to coincide with Chet’s retirement—the date when he plans to exit the operation. Originally, this was going to be when Chet reached 55. However, it is being extended because of farm income losses during the past two years stemming from weather damage.
- December 2012