Sowing Seeds for the Next Generation

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June 11, 2015


Land is one of the most meaningful and valuable assets parents can leave to their children.

 

Passing down a farm or a ranch to the next generation can provide heirs with a secure and valuable income stream for years if the land is well managed. That’s why farm and ranch owners should take steps that may protect their land and the revenue it generates for future generations.

 

Being a successful farmer, rancher or absentee landowner and manager requires a complex collection of skills, says Ed Cowling, Director of Specialty Assets for U.S. Bank’s Wealth Management Group. In addition to understanding the land itself, these operators have to be scientists, commodity brokers, meteorologists, communicators and, most important, business people who know how to negotiate. 

 

“Farming today is very technical,” Cowling says.

 

 

“As with any business, it’s absolutely necessary to have a plan in place to transfer that business when the time comes.”

Legacies Lost

That time is likely going to come sooner than you expect. The percentage of older farmers in the United States is steadily rising, and it is projected that by 2030, 70 percent of farm and ranch land in the country will change hands, according to an April 2010 study by The FarmLASTS Project, a project funded by the USDA. Land and legacy could be in jeopardy without a transition plan in place, says Jim Myhra, Managing Director of the Farm, Ranch and Timber Management Group at U.S. Bank.

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June 11, 2015


When owners fail to make a transition plan, they run the risk that the land will be mismanaged, sold off or lost because their heirs cannot come to terms over how the land will be operated. Once emotions take control of the heirs, the farm may be sold, Myhra says.

 

“If you don’t provide a legal entity and structure for how you want that land managed, you have no control over what will happen after your passing,” he says.

 

That’s an unfortunate but common occurrence. Seventy percent of first-generation farm and ranch operations do not successfully transition to the next generation, according to the University of Minnesota, CSREES, USDA 2008 and Farm Journal Legacy Project. The numbers are worse for second- and third-generation transitions, where failure rates rise to 90 percent or higher.

 

In his more than two decades in U.S. Bank’s Specialty Asset Management Group, Myhra has seen his fair share of sad stories of heirs who have come to him for help after losing inherited assets.

 

In one instance, a farm owner passed away with no estate or management plan in place. His wife and her children then leased the farm to a neighbor and longtime friend. Because the lease was made during

a time of duress, it had very good terms for the neighbor — so good that the wife didn’t have enough income to live on.

 

This forced the sale of 40 percent of the farmland holdings to the tenant at a price that was well below fair market value. The effects of these mistakes mushroomed: The sale also triggered unnecessary capital gains taxes. After the family spent years of sacrifice and sweat equity to build up the land, it lost 160 acres.

 

Looking for ways to avoid selling additional land, the family attorney contacted Myhra. U.S. Bank then took over management of the land as an agent for the family. The rental income was increased in a three-year time frame, which gave the mother the income she required and eliminated land sales to fund her needs.

 

To prevent this from happening again, she put a plan in place that made U.S. Bank the trustee of her trust upon incapacitation or death.

 

Generation Gaps

 

Securing a Legacy

While each client’s situation is unique and requires a customized plan, there are key steps to discuss with your tax and legal advisors that may help you build and oversee a transition plan with an intent to keep the legacy safe.

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June 11, 2015


1. Talk to the family.

The planning process begins with open conversations about what you and your family want from the farm or ranch, as well as the specifics of the plan. These conversations can be tricky, especially if more than one child is interested in or capable of managing the land — or conversely, nobody is interested. In these conversations, consider the following:

 

  • Do the different generations share a common vision?
  • Can family members work together?
  • Are family members willing to stay on top of technological and market changes?
  • Do family members have the ability to negotiate leases and other contracts imperative for generating a fair return?
  • Will they understand and have the time and resources to handle the agronomic and soil stewardship management? “You have to be honest about the family situation and make sure everyone agrees on the solution for this to work,” Cowling says.

 

2. Gather all of your business data.

Heirs need to understand what the farm or ranch business entails. As part of the planning stage,

gather all of the information you have about the land and the business, including expenses and debt, projected revenue, lease arrangements, ownership papers, depreciation data, land management documents and any other information that describes how the farm or ranch is operated. This will help you establish baseline financial expectations for the land and make decisions about the distribution of the estate.

 

3. Consider gifting or buy/sell arrangements.

In some cases, landowners may want to make arrangements to ease out of the management or ownership. Some owners use annual gifting (which is tax exempt) to gradually give the farm or ranch to succeeding family members while they continue to work alongside them.

 

4. Consider establishing a trust. 

Creating a trust for the property may bring many benefits. “It may protect your family from estate taxes, creditors, divorce and lawsuits, and it defines your wishes as to how you want that land to be taken care of and by whom,” Myhra says.

 

This governing document, which is drafted by an attorney, can establish how the land will be managed, who will be in charge, who will benefit from the revenue and how long the land will remain in the trust and under the trustee’s oversight. 

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June 11, 2015


A trust can be beneficial to landowners whose children may not want to actively manage the property. It can also help if the children don’t have the skills to manage the operation as an absentee landlord or to negotiate management contracts so that others can oversee the land. In these cases, the owner may deem that an unbiased third-party trustee manage the land. These land managers help ensure the best lease terms and commodity prices. They also oversee the care of the land and assets while the children and/or surviving spouse continue to benefit from the revenue and retained ownership.

 

Families have told Myhra that U.S. Bank’s services allow them to separate their personal relationships from their farm and ranch business relationships, he says. Because U.S. Bank or another third party takes on the farm management and decision-making processes, the family may get along much better.

 

5. Revisit the trust every few years.  

Revisiting the trust with a tax professional, attorneyand wealth advisor keeps it updated in relation to shifting estate taxes and helps accommodate anychanges in the family’s status, such as a birth

 

or marriage. Regular reviews and updates also demonstrate that your wishes haven’t changed. This can be important in families in which one or more parties contests the trust.

 

Myhra had a client, for example, who decided to leave her estate to a close friend who had cared for her for years rather than to her nieces and nephews with whom she wasn’t close. She changed her trust six years before she died and revisited it regularly. She also made a video recording with her lawyer that reaffirmed her wishes just 18 months before her death. When her nieces and nephews contested that she made the change under duress, the video was proof that they were wrong and their claim was denied.

 

“Her wishes were respected thanks to that video,” Myhra says. “But if you make a trust and don’t look at it again for 20 years, it is much easier to contest.”

 

Having a plan in place may help ensure that your wishes will be carried out. It’s the best way to work toward protecting your land today so that it may benefit your family for generations to come.

 

Please see important information below. 

 

 

Categories:
Wealth Transfer