June 2010 Archive for Leave a Legacy

RSS By: Kevin Spafford, Legacy Project

Kevin Spafford is Farm Journal’s succession planning expert for the Farm Journal Legacy Project. He hosts the nationally-televised ‘Leave a Legacy’ TV, facilitates an ongoing series of workshops for farm families across the U.S., and is the author of Legacy by Design: Succession Planning for Agribusiness Owners.

Have a succession planning question? Ask Kevin.

A Case of Unequal Transfer to Active and Inactive Children

Jun 29, 2010

From Legacy Moment eNews (June 25, 2010)
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John S. owns 100% of a C corporation that operates a very successful farming operation. John is a widower with four children. His oldest son, Jason, is a full-time employee of the operation. His other three children, Jane, Ken, and Julie, work outside the operation and are not involved in the business. John would like Jason to receive his full interest in the business, and he wants to provide each of his children with an equal share of his estate.

His assets consist of the following:

Cash	$ 300,000
Investment in business	2,500,000
Other investments	900,000
Total assets	$ 3,700,000

A review of John’s assets shows it will be difficult to accomplish both of his goals. Not considering estate taxes, Jason would receive assets with a fair market value of $2.5 million, while the other children would split $1.2 million (or receive only $400,000 in cash and other investments each).

Sound familiar? This is the crux of equal versus fair succession conundrum. Most farmers and agribusiness owners struggle with this planning puzzle. There are options available and tools to help you work through this issue.

Watch for constructive settlement methods in coming Legacy Moments.

News & Resources for You

Fair vs. Equal Planning Tool: The decisions involving your children may confound your best intentions. Use this tool for exploration and to generate discussion.

Follow the Legacy Project on Facebook: Sign in and see photo albums of our case study families.

Leading the Change – Legacy Project Workshops
The next series of Legacy Project Workshops are scheduled for Lincoln, Neb., on July 20; Des Moines, Iowa; on July 21 and Champaign, Ill., on July 23. Sign up online or call the Farm Journal Events Hotline for more information: (800) 909-3681.

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How to Use a 'Split-Off' to Transfer Ownership

Jun 23, 2010

From Legacy Moment eNewsletter (June 18, 2010)
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Paul Smith, a second generation dairy farmer in southwest Wisconsin, owns a large dairy herd and cheese processing facility. The operation is basically two separate units operated under the same entity structure - a dairy farm and a cheese processing plant. Though the two units share common management personnel, office facilities and equipment, each unit is run as a stand-alone business with separate bookkeeping.

Paul's son Steve and daughter Jan are both active in the operation. Steve tends the dairy and Jan enjoys the challenge of sales in the cheese plant. Each child currently owns 20% of the [combined] business, and Paul owns the other 60%. Though he plans to retire and transfer full control to his children, Paul knows, based on a history of merciless sibiling rivalry, that Steve and Jan cannot work together.

Paul says, "Any plan that may transfer equal control to the children will not work, and I won't consider any options that give one

child a controlling interest over the other."

With his specific goals in mind, and assuming Steve and Jan cannot work together, Paul may want to consider a 'split-off' - essentially dividing the business into two separate and distinct business entities. Paul could transfer ownership in the dairy to Steve and ownership in the dairy to Steve and ownership in the cheese facility to Jan. Assuming the business units are roughly of equal value, each child may feel empowered to grow their respective operation free of sibling rivalry.

The keys to success in planning for succession are well-defined objectives, clear communication and action. As long as a family can define common goals, agree on acceptable outcomes and work to achieve their goals they'll find a solution to address the most pressing objectives.

News & Resources for You

The Fair vs. Equal Conundrum: The puzzle faced by many farm families.

Don't Put It Off: Including 7 steps to guide the family succession planning conversation.

Leading the Change - Legacy Project Workshops: The next series of Legacy Project workshops are schedule for Lincoln, Nebraska on July 20; Des Moines, Iowa on July 21; and Champaign, Illinois on June 23. Sign up online or call the Farm Journal Events Hotline for more information (800) 909-3681.

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Why a Stock Bonus Offers Financial Advantages

Jun 15, 2010

From Legacy Moment eNewsletter (June 11, 2010).

Please join us for future issues, delivered via email each Friday.

Janette Green owns 100% of the family’s farming operation since her husband’s death seven years ago. Janette would like to transfer a controlling interest in the grain operation to her son Frank. Though he’s been working in the operation on a full-time basis since college, Frank has not acquired any shares of ownership.

Watch "Leave a Legacy" Episode #5!

Janette wants to gradually transition ownership to Frank over the next 10 years. She doesn’t want him to receive it as an unearned gift; on the other hand, he doesn’t have money to pay for an interest. Janette may want to consider using stock bonuses to transfer ownership to Frank.

A stock bonus for transferring ownership to a deserving next generation may have some advantages over gifting for the owner (parent) as well as the employee (next generation). Though a stock bonus triggers an income tax on the stock’s value, the highest individual income tax rate is still less than an owner’s marginal gift tax rate. The compensation deduction may reduce the net income tax on a stock bonus. And the employee’s (next generation’s) basis in the stock is fair market value with a stock bonus compared to a carryover basis for a gift.

News & Resources for You

15 FAQs about Succession Planning

A true Western legend, an innovative Wisconsin dairy, and the first family of one of the world’s largest cheese producers… What have you been missing on Leave a Legacy TV? Catch archived episodes online now.

Personality Plus: A close look at how managerial styles help the Dell family work together effectively.

Leading the Change – Legacy Project Workshops
The next series of Legacy Project workshops are scheduled for Lincoln, Neb., on July 20, Des Moines, Iowa, on July 21 and Champaign, Ill., on July 23. Sign up online or call the Farm Journal Events Hotline for more information: (800) 909-3681.

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Don't Gift Control Too Soon

Jun 01, 2010

From Legacy Moment eNewsletter (May 28, 2010)
Please join us for future issues, delivered via email each Friday.

Mark is the sole owner of his family’s dairy. The ownership transition phase of his succession plan calls for him to gift a controlling interest in the operation to his daughter Amy, who will succeed him as owner/manager of the operation.

Watch "Leave a Legacy" Episode #5!

The operation was appraised at $6 million (excluding the real estate which Mark will retain separately to enhance his retirement and ensure his financial security). If Mark were to gift 51% of the farm to Amy, the value of that interest would exceed the prorated $3,060,000 ($6,000,000 × 51%), because 51% represents a controlling interest which generates control premium.

Mark may consider gifting 49%, which may call for discounts based on a lack of marketability and a lack of control. A valuation appraisal may call for a 15% minority interest discount and a 15% control discount. Applying a 30% discount to the prorated interest provides a substantial gift tax savings. Keep in mind, when Mark eventually gifts 2% or more, he will be giving a controlling interest to Amy, and now the value of those shares may be subject to a control premium.

News & Resources for You

Leading the Change – Legacy Project Workshops
The next series of Legacy Project workshops are scheduled for Lincoln, Neb., on July 20, Des Moines, Iowa, on July 21 and Champaign, Ill., on July 23. Sign up online or call the Farm Journal Events Hotline for more information: (800) 909-3681.

Follow the Legacy Project (and see photo albums of our case study families) on Facebook.