Lori Esther shakes her head in disbelief sometimes at the thought of her sons farming together.
"Growing up, I didn't think they would ever stop fighting,” says Lori, with a mother's knowing grin. "Now they are best friends and business partners.”
Friends and partners today, brothers forever. That's the way Ryan and Chad Esther see themselves moving forward in their journey toward taking over the family farm operation near Beardstown, Ill. The Esther family was chosen to participate in the Farm Journal Legacy Project, an effort to chronicle the planning and implementation of a farm transition plan.
The family is entering into the second stage of succession planning: bringing youngest son Chad into the established operation. Chad recently returned home after working as a forester in Missouri. During the eight years that older brother Ryan has been home, he and their father, Chet, started EFFCO, now a 4,700-acre grain operation, with each owning 50%. The issue long at hand is how they would bring Chad into the operation.
"In everything we do with succession planning, the goal is to ensure financial security and keep the operating entity within active family members,” says Kevin Spafford, Farm Journal succession planning expert and founder of Legacy by Design, a succession planning firm that is guiding the Esthers through transition. "Getting Chad involved, whether with EFFCO or another entity, is integral to that goal.”
The Grand Plan.
Typically, there are three ways to bring the next generation into a family farm business:
1. Gifts of stock.
You may use your annual gift exclusion to transfer business interests. In this situation, a married business owner can transfer $26,000 worth of stock per year (based on 2010 allowable gifts).
2. Sale of stock.
The senior generation sells ownership interest to the next generation.
3. Stock bonus.
The senior generation may transfer ownership by paying a bonus in the form of stock instead of cash.
Legacy by Design explored each of the three options as a way to bring Chad into the family business, but, due to income tax and estate tax ramifications down the road, determined none of the options fit the Esthers' objectives.
Instead, it recommended creating a brand new partnership, called Esther Farms, with Chad and Ryan starting as equal partners and owners. Under this planning technique, the existing business (EFFCO) stays under Ryan and Chet's ownership, but any growth going forward will be done through Esther Farms, allowing Chad and Ryan to develop the business on an equal footing.
"It's really important for Chad and Ryan to start out as equals and grow the business together so that Chad feels he is earning his way just as Ryan has with his interest in EFFCO,” says Josh Sylvester, a Certified Financial Planner and principal of Legacy by Design.
Allowing the sons their own space and freedom to farm also sends a message to landowners about Chet's faith in the next generation, says Walter Lynn, the Esthers' longtime accountant. "I think this is a good decision for the family because it protects Chet's assets and it gives the boys a fresh start,” Lynn adds.
Establishing Lease Agreements.
To minimize startup costs, the existing company, EFFCO, will lease equipment to Esther Farms. It will also establish formal lease and rental agreements between the new partnership and the Esthers' construction company.
Both Ryan and Chad have secured operating loans based on input costs per acre and other various factors to begin operating this spring.
An important part of the Esthers' succession plan is transferring lease agreements from Chet to his sons. Currently, EFFCO leases about 1,000 acres from Chet's brother, Joe.
This year, Chet and Joe will transfer the lease agreement from EFFCO to the new partnership for Chad and Ryan to farm. Chet had to agree to allow that to happen.
"I think this is a great opportunity for the boys to learn to negotiate; if you can handle family as a landlord, you can handle anything,” Chet says.
Allowing Esther Farms to assume land lease renewals from EFFCO also effectively reduces the size of Chet and Lori's estate, which is helpful for estate planning concerns, Sylvester says.
"This is not an immediate transfer,” Sylvester explains. The plan establishes a five-year ownership transition wherein Esther Farms takes over all of the leases and the equipment to coincide with Chet's retirement option—the date when he plans to exit the operation.
Time can be beneficial, however. There is some new equipment that EFFCO recently purchased, and if the brothers' partnership continues leasing equipment from EFFCO for a while with the intent of purchasing it, the value of the newer equipment will depreciate.
"This gives Ryan and Chad time to gain some financial strength in their balance sheet before making other substantial equipment purchases,” Sylvester adds.
Liability Reduced. One of the big benefits of starting a new company to bring Chad into the operation is that it will not generate income tax or estate tax liability, Spafford says.
"There are really only the startup costs of a new business, and even those are substantially reduced since the boys can lease from the existing company,” he says.
The family also is not putting the profitable EFFCO at risk. "EFFCO is not lending capital or incurring any debt to bring in Chad, thereby reducing the liability of EFFCO,” Sylvester says.
Some of the strategies to bring Chad into the operation had the potential to affect the Esthers' eligibility to receive Farm Service Agency (FSA) payments. By implementing the proposed strategy, the Esthers accomplish their objective of getting Chad in the business while also maintaining FSA payments, Sylvester says.
Starting this spring, the brothers will be farming in partnership for the first time, making their own decisions on inputs, grain marketing and harvest. In the coming months, they will be developing an operating agreement that lays out the terms of their farming partnership and helps them define their roles moving forward.
"I think it's the best of both worlds,” Chet says. "This solution brings Chad into the operation but allows him to earn his own way. Meanwhile, the brothers are building the future of our family operation together, yet I can guide them if they need my help.”
And if the brothers' wrestling matches start again, Mom and Dad are around to help break it up.
Legacy Project TV Show Airs
The Farm Journal Legacy Project includes the "Leave a Legacy” TV show, dedicated to helping farmers sort through the complex issues of succession planning.
"Leave a Legacy” is hosted by Kevin Spafford, Farm Journal's succession planning expert. Each episode features farm business examples of success, planning resources and stories of exceptional leadership. Guests on the show include professionals who facilitate the succession planning process, entrepreneurs, authors and more.
All episodes will air on "AgDay” and again on "U.S. Farm Report” (RFD-TV only) on the following Sunday, or you can watch online at www.AgDay.com
The next episode is scheduled for March 25. For a complete list of "Leave a Legacy” episode airing dates, visit www.farmjournallegacyproject.com
Watch for upcoming issues of Top Producer to learn more about the Esther brothers' operating agreement.
Top Producer, March 2010