What is the status of your business succession plan? Have you revisited it since it was originally written? If not, chances are it needs to be updated.
A business succession plan should dovetail with the elders’ estate plan, allowing transfer of the family business to the next generation. And, as economic conditions change, you must review and adjust the plan to make sure that it meets your goals. A recent consulting visit I had with a dairy-farm family helps illustrate this point.
The father had developed a business succession plan and an estate plan a number of years ago. Two sons were involved in the farming operation, and there were four non-farming heirs as well. The farming heirs were to receive some of the land and the dairy operation. The non-farm heirs were to receive some land, some cash that might remain at the father’s death, as well as the proceeds of a life insurance policy. The father had invested in a life insurance policy to create a plan that he felt was fair to all of the children. The mother had already passed away, and the father had remarried with a prenuptial agreement in place.
Over the years, inflation, as well as the increase in profitability of the dairy operation, had enhanced the father’s net worth. In addition, during an expansion of the dairy, the father did not collect all of the rents he was due in order to help the farming heirs. But by not collecting the rents, he actually increased the dollars that the farming heirs would receive at his death. In summary, the plan was now “out of balance” and created an inequity between the farming heirs and the non-farming heirs.
The plan needed to be rebalanced. Three possible solutions were identified.
Option 1. The father needs to be paid the rents he was due. He should have taken the rental income, and then loaned the money back to the operation to be repaid at a later date. It’s not too late to get those funds to provide more liquidity in his estate. But he needs to be careful to not take too much income in one year in order to minimize the impact of taxes. He also should document the money due to him so his estate can be paid in the event that he is still owed money at his death.
Option 2. The father could alter the estate plan so that the non-farming heirs receive some of the real estate that is not essential to the direct operation of the dairy. Non-farm heirs make good landlords, but poor partners. The non-farm heirs can then rent the land to their farming brothers or even sell their share if the brothers’ cash flow permits a buy-out. The land can be placed in a trust for a period of time to make sure the farming brothers have enough time to raise funds to buy the land or to work out a rental agreement with the non-farming heirs.
Option 3. The father could alter the terms of his estate plan and require the farming heirs to purchase a portion of his ownership of the dairy operation rather than giving it outright to the farming brothers. The cash generated from the sale could return the plan to the balance he envisioned.
When was the last time you examined the contents of your business succession plan to see if it still meets your goals? Try to meet with your advisers this year to make sure your plan is still sound.
Darrell L. Dunteman is an agricultural financial consultant and accountant with offices in