The Moes partners, from left, Greg, Julie, Kathy and Jim, received their first briefing on vulnerabilities on land rental and buy/sell agreements.
After months of document collection and analysis, Greg, Julie, Jim and Kathy Moes were finally able to sit down with their Legacy Project advisers in April to start sifting through options. They met with succession planning expert Kevin Spafford, who leads Farm Journal’s Legacy Project, and team member Josh Sylvester. What their advisers found shocked the Moeses.
"There were a lot of surprises when Kevin and Josh went through our existing agreements," says Greg Moes. "We almost put the operation in worse jeopardy through the use of some of
In fact, within a week of their meeting, Greg and Jim were on a conference call with Sylvester to get suggestions on how to quickly amend some of the paperwork.
The Moeses milk 1,400 cows and farm more than 2,000 acres in Goodwin, S.D., and hope to pass on the operation to the next generation. The objective of the April meeting was twofold:
- To shore up existing agreements between Greg and Jim to ensure the current operation will survive should one of the brothers leave or die.
- To begin to look at what needs to be done to ensure that the next generation of Moeses can transition into management and eventually ownership roles.
The current documents were drawn up 20 years ago, when land values were much less and transition to the third generation was not as big a priority.
So land buy/sell agreements, stock transfer agreements within the Subchapter S Corporation and cash-based compensation agreements all must be rethought or redrafted to allow transfers between existing partners and to the next generation to begin.
"When the agreements were drawn up back in the ’90s, they were cookie-cutter agreements that worked for a lot of farm operations and other businesses," Greg says. "But there were not as many dollars involved as today.
It’s scary because the agreements don’t even come close to meeting our needs today," he says.
The first objective is to shore up existing agreements. Spafford and Sylvester identified several areas of concern should Greg or Jim leave the operation, become incapacitated or die.
For example, Greg and Jim have buy/sell agreements on land that is jointly held. The agreements state that upon the death of one of the brothers, his interest will be offered for sale to the surviving brother, with the closing to take place within 30 days.
The value of each acre of land is also set within the buy/sell agreement. Land inflation could make that set price unacceptable to the Internal Revenue Service for estate tax purposes. It could result in the IRS demanding taxes be paid on value that is never realized by the estate. And it could possibly even force the sale of the land to pay those taxes.
"This mandatory purchase obligation could prevent ownership from transferring to heirs upon the death of a brother," Spafford says. "Plus, the 30-day obligation to complete the transaction may be unreasonable. It makes more sense to have a 90- or 180-day time frame."
A Subchapter S Corporation owns MoDak Dairy, with Greg and Jim as principal stockholders. Neither spouse is listed as a stockholder, yet both are signatories to the loans that financed the facility. This could be problematic in the event of a divorce or death, Spafford says.
A buy/sell agreement for the dairy also sets the terms of sale should a stockholder die. Those terms require a 25% down payment, with the balance to be paid over three years.
"Will the corporation have enough cash to fund the down payment and enough free cash flow to service a debt obligation of the installment note payable over three years?" Sylvester asks. "It makes sense to revise the installment term to five, seven or 10 years."
Another area of concern is the land leases that sustain the cropping operation. Greg and Jim own about 1,000 acres of land that feed the dairy, and lease the land back to the dairy operation. "These ‘controlled’ lease agreements are at less than fair market value," Sylvester says. This could create a false economy that affects cash flow and operational growth.
In addition, MoDak Dairy leases 320 acres from a land trust established by Gerald Moes, Greg and Jim’s deceased father, and 540 acres from their mother, Eileen, age 82.
Both leases are renewed annually. That could be problematic if Greg and Jim’s siblings want to cash out should Eileen pass away. Spafford and Sylvester recommend that leases run at least three years or longer. To ensure fair rental rates, some type of inflation adjuster should also be included.
Eileen, who was present at the April meeting, seems amenable to longer leases. Susan Beaudry, Greg and Jim’s sister and one of two land trustees, was also in attendance. Though not opposed to longer lease terms, she needs to consult with another sister who is a co-trustee before changing any agreements.
- June/July 2011