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May 2012 Archive for Farm Estate and Succession Planning

RSS By: Andrew Zenk

This blog focuses on making complex and difficult topics in estate and business planning understandable and applicable to the reader.

Andy is an Agribusiness Consultant for AgCountry Farm Credit Services, Fargo N.D., a farmer owned cooperative and part of the Farm Credit System serving eastern North Dakota and northwest and west central Minnesota.

"Everything's Going as Planned" . . . Until it Doesn't.

May 15, 2012

This time of year, farmers are juggling so many things.  The need for strategic business planning often falls on the list of priorities, continually put off for other "immediate" priorities.  It's not a big issue, until things DON'T go the way you planned.  Do not learn the hard way on the importance of strategic business planning. 

Regardless of whether you farm individually, or if you are together in a joint ownership structure, you need to have a plan for what happens if there’s a death.  The same is true for a possible disability.  Or, what happens if there’s an argument and you can no longer work together? What happens if one owner has a child that wants to work into the operation, and the other doesn’t? What happens if one owner wants to retire, and the other doesn’t? What’s the plan? 
 
Imagine you are farming with your brother, and own almost everything together. You share machinery, equipment, and a farm / building site. You own most of your land together, as undivided equal owners. You share all expenses and profits, and work load. Things are going well. One day your brother has an untimely death. Reality has just changed from good to awful. The sadness and stress for your family and your operation is at an all time high. Not only have you lost a brother, you have lost your business partner and a crucial member to your operation.  You wonder how things will work now that he’s no longer there. What’s the plan? 
 
Now picture his wife. She has just lost her husband and is overwhelmed with grief and fear. Further imagine that this newly widowed woman has very little to do with the farming operation, being busy with her own work off the farm, her children and with all of life’s demands. These demands on her time have not provided her with the "day to day knowledge" of the farming operation. All she knows is that there are a lot of expensive assets and that there are liabilities against those assets. She knows because she signed the notes for them as your brother’s spouse. She wonders how she will pay for all of those liabilities, and support her family. 
 
Now picture the time when your brother’s estate is being administered. Imagine yourself sitting down with your brother’s widow, and her estate planning professionals and the discussion begins on what happens with the jointly owned farming assets: your machinery and equipment, your farm site and buildings, your land. You share assets, but you do not share goals for the future. Your goal is to continue farming. Her goal is to make sure she receives her assets and can pay off her debt and support her family. What’s the plan? 
 
With this picture in your mind, I’ll ask the question asked earlier again: "How will things work out?" If your answer remains "it will work itself out; no need to worry about it", frankly, that’s not realistic and that mindset can be disastrous for your business. There is no doubt it will "work itself out", but the frustration, anguish, expense and stress will likely be overwhelming both financially and emotionally. Moreover, your farming operation may be at a point where you as the surviving brother are no longer financially able to farm in a viable manner. No one wants this, but without planning, it can easily be reality.   
 
So, what can you do? The key to avoiding this and many other similar situations is to proactively plan for them using a method known as a "buy-sell agreement." A buy-sell agreement is a document where all owners of a business proactively plan and agree on a course of action in the event of death, disability or departure (break up of the business.)  Think of it as being proactive: having a clear, fair way to handle any of the above referenced situations. A buy-sell agreement is a "roadmap" that outlines how the farm would continue in the event of death, disability or departure. Additionally and equally as important, it outlines how the families would be taken care of as well, should something happen. It puts everyone "on the same page" with the operation, and know that a plan is in place, should something happen. 
 
Let’s Re-visit the above example with the brother’s untimely death. Assume everything is the same, except the families took the time prior to brother’s death to complete a buy-sell agreement. This agreement specifically outlined a plan of action in the event of a death so the farm could continue to operate, and the family of the deceased brother was taken care of as well. Imagine you as the brother, and the peace of mind you would feel, knowing everything is in place. Imagine you as the widow, and the peace of mind you would feel, knowing everything is in place. Everything was decided ahead of time, and everyone’s needs were met.    
 

Buy-sell agreements are very important in any business, but especially in farming. These documents are built specifically for each operation, finely tuned by your professionals to meet your goals. It is absolutely crucial from a business standpoint to work on this. If this is something you have not done, I strongly suggest you sit down with your professionals and build a plan specifically tailored to your unique situation. It will be well worth the time and effort.

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Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
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