Have you developed a business succession plan?

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As the owner of a privately held farm, you are undoubtedly involved in every facet of the operation.

However, you will leave the business at some point in time. You could leave for a number of reasons — retirement, disability or death — so you owe it to yourself, your loved ones and your business partners to plan for a successful farm transition.

Proper planning is critical, for a number of issues come into play, including income and transfer tax consequences, financial considerations, and determining the best way to transfer the management and ownership of your farm to others. If you fail to address these issues, all of your time and hard work, as well as your financial security, may be in jeopardy.

Start asking questions
Who will own the farm and who will manage it upon your departure?  It may not necessarily be the same person. Are your children interested in running the farm? Are they qualified? In the event of your death, will your surviving spouse and family have an adequate income?  Have you considered the cost of transfer taxes?  Have you created or updated an estate plan to reflect the latest tax laws? Have you discussed your ideas with family members and business partners to try and ensure accord?

The number and complexity of questions surrounding business succession can be overwhelming. And, while it takes a good deal of work with the proper advisers, succession planning can yield enormous benefits. By using an integrated strategy, you can develop a business plan that will help reduce estate and gift taxes, generate retirement income, transfer the management and ownership of your farm to others, and help protect the farm and your family against financial losses.

Use these tools
Writing a successful plan to transfer your business from one generation to the next takes time. Don’t think of it as something you can do in an afternoon. In fact, many experts believe the plan should be developed over time, starting at least a year or two before you want to bring a partner — son or daughter or another dairy producer — into the business.

Here are some of the tools to consider as you develop your plan:

  • Life insurance can provide the liquidity needed to pay estate taxes, buy out a co-owner’s interest, attract or retain talented employees, or replace the economic value of a key person.
  • Buy-sell agreements can help establish the farm’s value and ensure the orderly and efficient transfer of business interests when an owner leaves the farm due to retirement, disability or death.
  • Lifetime gifts of business interests may be attractive if you expect your farm to appreciate in value. By using this strategy, gifts made during your lifetime — cash or assets — can pass to your children tax-free. In addition, any appreciation of assets or interest earned is not included in your estate, nor subject to gift taxes.
    These gifts are in addition to the $11,000 per year that you can currently gift to children or other heirs without paying gift tax. However, gift amounts greater than $11,000 per year are applied toward your lifetime exemption from estate taxes — currently at $1 million. So, for example, if in one year you gifted a child $50,000, the first $11,000 falls under the annual gift tax allowance and the remaining $39,000 would apply toward your lifetime exemption of $1 million.
  • Family limited partnerships and limited liability companies can be used to transfer a portion of your business to family members at a discounted gift tax value. These entities may help protect your family’s wealth and reduce the size of your potential estate, while allowing you to retain managerial control over the farm.
  • Private foundation gifts made during your lifetime qualify for charitable gift tax deductions, and possible income tax deductions, while gifts made at death qualify for charitable estate tax deductions only.

Because no two farms are alike, it’s important to work with experienced professionals who can help you implement appropriate planning techniques tailored to your specific needs. For your protection, it is important to start planning today for the future you want to create.

David Chlus is a first vice president of investments with Smith Barney, Inc., in Utica, N.Y., and partner in a 90-cow dairy.



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