The Esther Family The Esthers are a farm family chosen to participate in the Farm Journal Legacy Project. We hope others can learn from their experiences by following their succession planning process in the pages of Top Producer, online and on television.
A wise parent does not prepare the path for the child, but instead prepares the child for the path. That's the learned perspective of Chet and Lori Esther of Beardstown, Ill., founders of Esther Family Farming Company (EFFCO).
The Esthers spent 30 years raising a family and building a profitable 4,700-acre grain operation, a construction company and a semi-truck and trailer dealership.
Now the family is eager to begin the journey of transitioning the multiple-entity business to the next generation. The Esther family was selected to be included in Farm Journal's Legacy Project, an effort to chronicle the planning and implementation of a farm transition plan.
Family Picture. At just 51 years old, some might say farm founder Chet Esther is too young to retire. But while continuing his active business-leader life (he currently serves on the board for Growmark Inc., a regional cooperative, and Two Rivers FS, Inc., a local farm service company), he hopes to retire by age 55 and remain a "helpful hired hand."
Chet's career began in high school, when his dad gave him 13 acres as an FFA project. He and his brother, Joe, each inherited 600 acres when their parents passed away 20 years ago. These acres formed the foundation for the EFFCO operation, which now includes 2,000 acres owned by Chet and his wife, Lori.
Lori has spent the past three decades raising the family and keeping books for the farm. She recently retired, handing over the book work to a full-time secretary.
Sons Ryan (32) and Chad (29) both now live on the farm. Ryan is married to Erin and they have two daughters. Chad and wife Tanya have one young daughter.
Sons Come Home. At first blush, the succession plan seems straightforward: Use proper estate planning and succession tools to transfer land and business assets from parents to sons over the next two to five years.
The sticking point is tenure. Chad just recently returned home after working as a forester in Missouri. During the eight years Ryan has been home, he and his father started EFFCO, with each owning 50%.
"For Chad to buy in would cost him about $800,000," Chet says. "That's not really fair to ask, since Ryan didn't buy in at that level."
However, it is important to recognize Ryan's time on the farm and the fact that he signed bank loans and took on the risk, says Farm Journal columnist and Legacy by Design founder Kevin Spafford.
Ryan wants an equal partnership, and he is willing to let Chad buy in at the level Chet deems fair. "I chose to stay home and I have benefited from using the equipment for my own operation," Ryan says.
"This is a situation where equal may not be fair, and that is the leading issue in succession planning," Spafford says. "We have to find measurements for making an equitable distribution." Legacy by Design is working with the Esthers to develop a plan to bring Chad in.
Chad struggles—both emotionally and financially—with the issue of how to rejoin the family business. "It's only fair that I buy into the operation, but it would be difficult given its value today. I know I can help the operation become more efficient and help it grow.
"Honestly, I don't know how to get back into the operation," he adds.
"Chad may never catch up to Ryan in terms of ownership percentage, and that's OK, as long as we make sure he is compensated equitably," Spafford says.
Land Transfer. Another potential issue is that the land is held in Chet and Lori's names. They are concerned about how to transfer land without incurring a large estate tax burden.
There is also a decision to be made about whether to transfer land into just the sons' names. For example, if land is in both the sons' and daughter-in-laws' names, it would be difficult to keep farm ground in the family in the event of a death or divorce.
This decision is especially difficult for Lori, who well remembers the pain of being treated like an outsider when Chet's parents transferred land to him and his brother, Joe.
"I always knew my name would not be on land passed to Chet, but I would have liked to have been informed about decisions regarding the farm and our future," Lori says.
The first priority when passing on land is to protect ownership interests, Spafford says. "We don't want to take away from Chet and Lori's retirement security by transferring too much land out of their names. We also don't want to tie the hands of the next generation."
One option is for Chet and Lori to gift ownership over their lifetime to family members, says Josh Sylvester, a Certified Financial Planner specializing in succession planning and co-owner in Legacy by Design. Sylvester is helping the family design a plan.
Lifetime gifts remove both the gifted property and any subsequent appreciation on that property from the donor's taxable estate, Sylvester says. The Esthers can also take advantage of the donor's annual gift tax exclusion ($13,000 for 2009) and the applicable exclusion amount for lifetime transfers ($1 million) to transfer assets free from gift tax.
"A lifetime gifting program allows the owner to transfer ownership gradually," Sylvester adds. "The next generation then can slowly grow into the role of owner."
Never Too Late to Plan. In retrospect, Chet worries he didn't prepare enough for the coming transition. "We spent the first 30 years getting ahead. Now we need to focus on our legacy," he says. "We have wills, but we haven't done much planning for the next generation."
Spafford says his clients often feel that succession planning is futile. "There are so many issues with succession, and it is so complicated, with many decisions to be made," he explains. The good news is that by getting some of the big issues, such as transferring land, out of the way, the family can knock out a list of other concerns as they arise.
Top Producer, November 2009