With only a few years until retirement, Beardstown, Ill., farm owners Chet and Lori Esther are working hard on their succession plan and financial security.
The Esthers begin taking steps toward financial security.
From day one of the succession planning process, Chet Esther has been up-front about his plans for retirement. "I want to retire at 55," he says proudly. He doesn’t hear the snickers from his sons, Ryan and Chad, who wonder if their dad will ever stop working. Chet admits his workaholic tendencies, so the family’s doubts are understandable.
Chet and his wife, Lori, hope to build a retirement plan that provides the funds and flexibility for them to travel or take on new business ventures. "As we evaluate options for their ownership transition, Chet and Lori’s financial security comes first," says Kevin Spafford, Farm Journal succession planning expert. "Before they transfer land or other assets, they must be confident that they can live comfortably in retirement or afford the next venture in their life."
Financial security is one of four elements of a comprehensive succession plan, affirms Josh Sylvester, a Certified Financial Planner and member of the Legacy Project team. It works in concert with the other three elements: ownership transition, estate planning and leadership development. Each element is essential to a comprehensive succession solution.
"When we focus on Chet and Lori’s financial security, we have to start with an accurate assessment of their financial needs and capital resources," Sylvester says. As they envision retirement, the Esthers are working on the following goals:
- Analyzing their retirement income and expenses, with particular attention to the noncash benefits they’ve enjoyed as farm owners.
- Debt reduction for their remaining working years.
- Establishing a fund for unforeseen expenses.
- Planning for other "choice" obligations, such as travel, charitable intentions and special needs.
- Integrating the estate plan, mitigating the tax burden, maximizing spousal support and protecting the operation in case of premature death or debilitating illness.
Budget matters. An accurate budget and detailed cash flow analysis will help the Esthers make good decisions in the succession planning process. Each option in the transition phase of the process will be weighed against their ability to "afford" the option. "We cannot make a recommendation that might jeopardize the senior generation’s financial security," Sylvester says.
Chet and Lori would love to transfer ownership of their land to Ryan and Chad, yet losing the rental income may undermine their financial security. The potential estate tax liability weighs on Chet’s mind. Gifting strategies and other techniques to remove assets from an estate must be evaluated against the Esthers’ future cash flow requirements. Chet and Lori may need to convert equity to cash or receive income from the farm to supplement retirement.
"The financial security analysis we will provide for Chet and Lori gives them a frame of reference for how all the interrelated aspects of a comprehensive succession solution work together," Sylvester explains.
Annual reviews critical. Once the plan is in place and the transition is in motion, annual reviews will help the Esthers stay on track. "Succession planning is never a once-and-done event," Spafford says.
Events such as buying or selling an asset; assuming a debt; birth, death, illness or unforeseen calamity all affect financial security and call for an immediate update, Sylvester adds. He also cautions that changes in the rate of inflation, investment returns and tax developments may necessitate revisions to the plan.
By taking the necessary steps before retirement, the Esthers will have peace of mind in knowing they can achieve their goals.
Estate Tax Carries Bigger Bite
The resurrected estate tax carries more bite this year as the exemption level dropped to $1 million per person and the top rate reverted to 55% or higher. Analysts speculate that Congress won’t allow those low levels for long.
So what’s a farmer to do? "You must assume there will be an estate tax for the foreseeable future and get a plan in place soon," advises Ken Fransen, tax attorney and partner with Bolen Fransen LLP in Fresno, Calif.
The techniques that generally have been available in the past should be available in the future with possible exceptions. One is the use of valuation discounts arising from the use of limited partnerships, Fransen says. This is where the discount for a minority/noncontrolling interest is largely determined by the degree of control that the limited partners have over the assets in the family limited partnership. Such situations generated substantial discounts in the past, but Fransen expects there will be congressional activity to reduce those discounts.
"We are advising clients to set up their structures and make their transfers before it is too late," he says. "Grab the discounts while they’re available by substantial gifting or sales."
The Esther Family
- Legacy Project 2011 Report