The Road to Retirement

September 1, 2010 05:44 AM

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From day one of the succession planning process, Chet Esther has been up-front about his plans for retirement. "I want to retire at age 55," he says proudly. He often doesn’t hear the snickers from his sons, Ryan and Chad, who wonder if Dad will ever truly stop working. Chet readily admits his workaholic tendencies, so the family’s doubts are understandable.

Chet and his wife, Lori, hope to build a retirement plan that provides the funds and flexibility for them to travel or take on new business ventures. "As we evaluate options for their ownership transition, Chet and Lori’s financial security comes first," says Kevin Spafford, Farm Journal succession planning expert. "Before they transfer land or other assets, they must be confident that they can live comfortably in retirement or afford the next venture in their vocational life."

Financial security is one of four critical elements of a comprehensive succession plan, affirms Richard Dee, a Certified Financial Planner and member of the Legacy Project team. It works in concert with the other three elements: ownership transition, estate planning and leadership development. Each element is essential to a compre-hensive succession solution, and none of the elements can be addressed in isolation.

"When we focus on Chet and Lori’s financial security, we have to start with an accurate assessment of their financial needs and capital resources," says Josh Sylvester, also a Certified Financial Planner and part of the Legacy Project team. As they envision retirement, the Esthers are working on the following goals:
• Analyzing their retirement income and expenses, with particular attention to the noncash benefits they’ve enjoyed as farm owners.
• Debt reduction over their remaining working years.
• Establishing a contingency fund for unforeseen expenses.
• Planning for other "choice" obligations, such as travel, charitable intentions and special needs.
• Integrating the estate plan, mitigating the tax burden, maximizing spousal support and protecting the operation in case of premature death or debilitating illness.
Budget Matters. An accurate budget and detailed cash flow analysis will help the Esthers make good decisions in the succession planning process. Each option in the transition phase of the process will be weighed against their ability to "afford" the option. "We cannot make a recommendation that might jeopardize the senior generation’s financial security," Sylvester says.

Chet and Lori would love to transfer ownership of their land to Ryan and Chad, yet losing the rental income may undermine their financial security. The potential estate tax liability weighs on Chet’s mind. Gifting strategies and other techniques to remove assets from an estate must be evaluated against the Esthers’ future cash flow requirements. Like most farm owners, Chet and Lori may need to convert equity to cash or receive income from the farm to supplement retirement.

"The financial security analysis we will provide for Chet and Lori gives them a frame of reference for how all the interrelated aspects of a comprehensive succession solution work together," Dee explains. 
Annual Reviews Critical. Once the plan is in place and transition is in motion, annual reviews will help the Esthers stay on track."Succession planning is never a once-and-done event," Spafford says. Chet and Lori will annually re-evaluate their plan and more often if needed.

Events such as buying or selling an asset, assuming a debt, birth, death, illness or unforeseen calamity all affect financial security and call for an immediate update, Sylvester adds. He also cautions that changes in the rate of inflation, investment returns and tax developments may necessitate plan revisions.

By taking the necessary steps before retirement, the Esthers will have peace of mind in knowing they can achieve their goals.

Prepare For Estate Tax Comeback

Tax specialists everywhere are gearing up for when the federal estate tax comes back next January. The resurrected tax will carry more bite in 2011 as the exemption level is scheduled to drop to $1 million per person and the top rate reverts to 55% or higher. Analysts speculate that Congress won’t allow those low exemption levels to stand for long, but what law will be put in place is anyone’s guess.

So what’s a farmer to do? "You must assume there will be an estate tax for the foreseeable future and get a plan in place soon," says Ken Fransen, tax attorney and partner with Bolen Fransen LLP in Fresno, Calif. 

The techniques that have generally been available in the past should be available in the future with a few possible exceptions. One is the use of valuation discounts arising from the use of limited partnerships, Fransen says. This is where the discount for a minority/noncontrolling interest is largely determined by the degree of control that the limited partners have over the assets in the family limited partnership. Such situations generated substantial discounts in the past, but Fransen expects there will be some congressional activity to reduce those discounts in the future.

"As a result, we are advising clients to set up their structures and ideally make their transfers before it is too late," he says. "It makes sense to grab the discounts while still available. That can be done through substantial gifting or sales."

Now, Not Later. Even though no one knows what the final estate tax will look like, estate plans can be put into place now that set the stage for more critical work next year.

"Today is when farmers should set up a limited partnership or other family entity because those typically need to be done at least six months before any gifts or sales are made," Fransen says. "Get a plan in place now so that by spring of next year, you are ready to go."

Sign Up to Attend a Legacy Project Workshop

> December 7: Indianapolis, Ind., The Forum at Fishers
> December 8: Columbus, Ohio, Bridgewater Banquet & Conference Center
> December 10: Lansing, Mich., Kellogg Hotel & Conference Center

To register for a workshop, visit or call (800) 909-3681.

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