From Our Side Of The Fence
Dairy Star • Saturday, December 7, 2019 • Page 15
Lawyers: When should families develop a transition plan?
Jason Wagner Ward & Oehler, LTD Rochester and St. Charles, Minnesota Tell us about your ďƒžrm’s experience with farm transitions. Our law ďƒžrm was established in 1973. We have the unique experience of having worked with multiple generations of families through their transition. Some of the farm families we work with are now on their fourth generation of working with our ďƒžrm. There are also farm partnerships that were established by the ďƒžrm in the 1970s that are still in use today. When should families start the process of developing a transition plan? Practically, the right time to start a transition plan is when there is commitment from the retiring farmers and the successor to a long-term and successful transition. A well thought out estate plan is often the starting point for a farm transition. Families do not always know who the farm successors will be, if any. In many cases, they have an idea of which children are likely to make a career of farming, but they are not ready to start a formal plan. Through the estate plan, families can build in ďƒ&#x;exibility and incentives to allow a transition after death if the parents die prematurely. From there, families should start giving more responsibility and management duties to the farm successor once they have an idea of who that person is. This lets them test the waters before adopting a formal plan. If that goes well, the transition plan can start being developed. How should families prepare for their ďƒžrst meeting? Should family members prepare for an individual meeting with you? It is best to start with good information and records. This means an updated balance sheet with accurate values and debt is crucial. Family members should also be prepared to answer questions about their goals with the farm, their commitment to the transition process and a realistic idea of what they need from the farm ďƒžnancially. Often times, retiring farmers are going to need to rely on farm rental income. It is a good idea for the retiring farmers to meet with the attorney by themselves for the ďƒžrst meeting so they can share any concerns they have about the successor with the attorney privately. How many times do you visit with a family going through a farm transition? Some families may like to meet individually several times over the course of a year or two before they are ready to bring the successor into the discussion. This may be because they are wanting to analyze options for the transition or working on how to balance the transition plan with inheritance for non-farming children. Other families contact me when they are ready to implement the transition plan, so we move fairly quickly from an individual meeting to a family meeting. We review asset information, tax implications, estate planning objectives, and short-term and long-term goals. The plan is usually a 5- to 10-year plan at minimum, so once it is implemented, we usually meet annually. The annual meeting is an opportunity to update values, review the operating agreement and transfer additional ownership interests as needed. What suggestions would you make for families who have children not a part of the farm? I recommend communication. Unfortunately, sometimes nonfarming children do not see the many long hours and last-minute emergencies the farming children take on to keep the farm running. They also may not realize the farming children had no or low pay for much of the labor provided to the farm. Instead, it might not be until Mom and Dad are both gone or the transition is complete that they see the farm (and its value) is now in the hands of the successor. By sharing some of these considerations with the non-farming children, hopefully they will have a better understanding of the decisions the parents have made. Families should also realize they can build in rental options, purchase options and other devices to allow the non-farming children to receive an economic beneďƒžt from the farm while still transitioning it to the farming children. What are two common pieces of farm transition often overlooked? First, it would be not having an estate plan that supplements the transition plan. Something could happen to the parents or the children before the transition is completed. These contingencies should be discussed and planned from the outset. Second, it would be continued attention. A farm transition plan only works if it is maintained until completion. Many farm transition plans rely on regular gifts or sales of assets to complete the transition. If this is only done sporadically, the entire plan can be
Scott Miller Miller Legal Strategic Planning Centers, P.A. Tyler, Minnesota Tell us about your ďƒžrm’s experience with farm transitions. We practice exclusively in the areas of estate planning with 95% of our clients owning a farm business. We have approximately 1,100 farm families that we have done the planning for and meet with them regularly, most annually, to keep their plans up to date for their current circumstances, the laws and the changing of their farm business. When should families start the process of developing a transition plan? The family has to be ready both mentally and emotionally to make this step. If they have a child or children entering the farm business, it is best to get them integrated earlier than later from an ownership and responsibility stand point. Most of our clients are beginning the transition when their children have been in the business full time for 3-5 years and the parents are usually in their 50s to 60s. How should families prepare for their ďƒžrst meeting? Should family members prepare for an individual meeting with you? They need to think about their hopes, dreams, goals and aspirations. They need to think big picture because they generally don’t have the experience to identify all the small issues that need solving. They need to think about the timeframe for the transition, what are their speciďƒžc exit planning goals, what retirement income they will need, general cash ďƒ&#x;ow of the farm business, and how and what would make things equitable for the non-farming heirs. Equitable does not necessarily mean equal. How many times do you visit with a family going through a farm transition? To design a plan for farm transition, it will involve 3-4 meetings of about two hours each, plus them preparing for each meeting such as sending them items to consider prior to the meeting to direct them to certain issues that need to be solved. Once the plan is complete, we generally meet with our farm business clients annually to keep up all of their farm business legal matters and to keep their plan up to date. What suggestions would you make for families who have children not a part of the farm? The main issue will be how to treat those heirs equitably while still making sure the farm business can succeed during both good and bad farm economies as we know the next generation will experience both ends. What are two common pieces of farm transition often overlooked? The No. 1 issue we see with most plans is there is no plan dealing with the conďƒ&#x;icts that could and do exist between the farming heirs and the non-farming heirs. The clients assume their children will always get along and that the inďƒ&#x;uences of spouses of children have no impact. There is no planning for bad facts such as a child getting divorced, an untimely death of a child after the death of the parents, and a bankruptcy or creditor issue of one child affecting the other children if assets are owned together. We preach to our clients to plan for bad facts and your plan to still work, and pray for good facts. What is the importance of working with an attorney or outside third party for a farm transition? The experience and focus of the attorney or outside third party. I use the medical model in that you want to work with a specialist or someone that spends at least 70% of their time working in estate planning and farm transition. It’s that professional’s experience seeing many ďƒžles that will help that client make a successful plan that is individually designed for their goals and facts. And, for that attorney to have some form of annual maintenance or follow up to make sure the plan will continue to work once it is designed. disrupted. What is the importance of working with an attorney or outside third party for a farm transition? There are many aspects to consider with a farm transition plan. Income may be shifting, deductions may no longer be available, control over decisions may lessen, among many other possibilities. It is important to be able to anticipate and plan for these changes. Families will also want to protect the farm in the event the transition plan does not pan out, so a good operating agreement becomes a necessary part of the plan. An attorney can help with identifying the issues and preparing the legal documents to ensure a smooth transition.
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