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Road Map to a Legacy

July 1, 2010
 
 

 

The Dell family was lost. Although the road to farm succession was paved with good intentions, trips to accountants and attorneys had always ended in more confusion than direction for the Westminster, Md., farm family. They were struggling to incorporate the hopes and dreams of four generations and six separate families.

Strong emotions and fear of change were hampering the business. The depressed dairy market was putting financial pressure on the farm. Some partners wanted to abandon the dairy and others wanted to save it. Land purchased with development plans was being questioned in view of the down housing market. The division-of-labor lines were starting to blur and different personalities were beginning to interfere with the decision-making process.

"We were all still physically working hard at our respective farm jobs and all still respected each other," says Greg Dell, one of the two sons in the second generation. "At the same time, we were all afraid of change and, ironically, the inability to find a way to change was eating away at us."

One of the first items of business for Farm Journal succession planning expert Kevin Spafford and his Legacy Project team was to prepare a written plan to chip away at the family’s succession issues one generation at a time and help reduce indecision and frustration.

After months of work, the mechanism has been put in place for two family members to retire. A chunk of the dairy herd has been sold. In addition, a new attorney has been retained to write up the proper buy/sell agreements. The first steps have been taken to formally include the next generation of Dells into the farm operation.

ONE STEP AT A TIME. Fortunately, behind the fears that were holding back the operation were hard numbers. Each family member did his or her homework to provide the Legacy Project team with the figures necessary to reveal a complete picture of the farm’s financial health. Professional appraisals are often needed during this part of the planning stage to establish realistic values of what the farm is worth and to set up meaningful cash flows and budgets.

"Our main interest is to support the integrity of the operation and meet the family’s transition goals," Spafford says. "Succession planning must enhance the family’s financial security."

When the Dell family came to the table together, they were united in some goals and divided in others. The multigenerational nature of most family operations makes it best for the chore of succession planning to be accomplished in incremental steps.

"We’re handling the Dell business transition in two separate phases," explains Josh Sylvester, Certified Financial Planner and a member of the Legacy Project team. "Phase one focuses on the family members who want to exit the day-to-day farming partnership and set the stage for the ownership and leadership transition of the operation."

Spafford calls succession planning a team event that requires a "quarterback" or facilitator. Beyond himself and Sylvester, the Dells’ team now includes their banker, accountant and attorney. Other experts may be added down the road.

"To date, we have well over 100 hours of research and discovery on the Dell case," Sylvester says. "That’s the legwork that goes into the recommendations and written succession plan."

With the plan in hand, one point needed no negotiation. Everyone is committed to making sure the standard of living for Donald and Leona Dell, the senior living generation, is not compromised.

"A careful review of the financial portfolio for Donald and Leona prompted us to recommend additional types of investments as a defensive tactic," Sylvester says. "After consulting an attorney, we also recommended they update their estate planning documents and draft a revocable living trust to avoid probate and distribute assets based on their wishes."

The next step in the Dell transition was to find a way for the eldest brother, Roger, to retire. The stumbling block here is that, as on many farms, the dollar value of his portion of ownership represents more than the farm business can financially withstand in an immediate buyout.

Fortunately, intrafamily installment sales of property offer a variety of practical, as well as tax, benefits. When parties are related, greater flexibility can be achieved with regard to the payment amount, terms and conditions. The seller’s cash flow requirements and the buyer’s ability to service the debt can all be considered in the equation.

Roger, for his part, says he has no desire to do anything to put the farm operation at risk. Several options were considered before the brothers agreed on a 20-year, no-down-payment installment sale that provides Roger with annual income.

"Roger will receive fair market value, less discounts due to limited management control and marketability," Sylvester says. "He wants the operation to succeed, yet he also wants to retire with some financial security. It doesn’t do him a bit of good to agree to sale terms that may jeopardize the operation or cause him undue worry in his retirement."

In carrying a note, Roger assumes some risk. He remains dependent on the long-term viability of the operation. He must also consider how he will feel if the farm appreciates after the buyout. His children are not involved in the farm, but they are heirs. There are tax implications—income, estate and capital gains—to consider, too.

Again, such complexities are why farm families often struggle to find resolution, Spafford notes. "Our job is to keep weeding as these things sprout up," he says. "There is certainly no one answer and no one perfect solution."

Greg Dell, along with his wife, Della, will feel the weight of the installment sale. It’s unlikely that they will ever be able to step away from the farm in a similar fashion.

"I thought at one point of my life, when my boots were sticking up, there might be a time when I wouldn’t owe anybody anything," Greg says. "When you’re living, 20 years goes pretty fast, but not so when you’re paying."

MORE TO COME. This year, Greg and sons Tommy and Gary will move into their new roles in the business and will establish an operating agreement, Spafford says. Watch future issues of FARM JOURNAL for coverage of how the father-and-sons team sets up its business plan and future goals.

Meanwhile, Donald, Leona and Roger are adjusting to a life less involved on the farm. FARM JOURNAL will check in with these family members in the months to come, as well.

Once lost, now found, the Dell family is on track for a transition.


Charting the Dell Family Legacy - Phase I

 

  1. Ensure Donald and Leona’s financial security.
  2. Roger Dell sells his share in two family corporations to Greg Dell after agreeing on terms (price, interest rate and payment mode).
  3. Leona Dell transitions bookkeeping responsibilities to Shannon Dell.
  4. Donald and Leona Dell transition preferred stock to Greg Dell.
  5. Partial sale of dairy cows to reduce debt.
  6. Review current C-corporation ownership structure.
  7. Review current estate planning documents to ensure they meet objectives.
  8. Minimize taxes on each estate and ensure funds are available to pay any tax due.

 


Next Steps for the Dells

 

  • Ensure that the initial transition is progressing—Donald/Leona to Greg; Roger to Greg; Leona’s bookkeeping responsibilities to Shannon; interests in the dairy to Gary/Crystal; sell the balance of dairy operation and take action and legal work to support.
  • Leadership development for Greg, Gary and Tommy.
  • Promote business planning for Greg, Gary and Tommy.
  • Personal financial planning for each family unit—Donald/Leona, Greg/Della, Tommy/Shannon (if desired, Roger/Deanna, Gary/Crystal and Douglas/Lindsay).
  • Personal estate planning for each family unit.  
  • Take a long-term look at the operation’s growth opportunities, then review family/operational goals.

The Dells on TV

 

You can follow the transition process for the Dell family in the pages of FARM JOURNAL—as well as on Legacy TV. In the first episode, which aired in late January, we met the Carroll County, Md., family who had just started the transition journey. In the fourth Leave A Legacy episode, Tommy Dell, who represents the third generation of the family, met with Texas A&M’s Danny Klinefelter to talk about creating a strong leadership development plan and mentor relationships. Visit www.FarmJournalLegacyProject.com to watch the Legacy TV episodes.

 

 

 

 

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FEATURED IN: Legacy Project - Legacy Project 2010 Report

 
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