3 mistakes to avoid when handing down the farm

If you own a family business, and want the next generation to have a chance to succeed, make sure that your business-succession plan and estate plan work together.

It doesn't sound difficult, but often is. And, generally, the one who gets surprised is the farming heir. The farming heir may, for example, have to buy out the siblings right away as opposed to using the long-term purchase contract contained in the business-succession plan.

An estate plan always trumps a business-succession plan, explains Darrell Dunteman, accountant and agricultural financial consultant in Bushnell, Ill. That's because an estate plan is an executed legal document and the business-succession plan normally is not. The future success of your business depends on these two documents working in unison to achieve your intended goals.

Here are three common problems that can occur when business-succession plans and estate plans are not in synch. 

1. No plan for premature death

In order to protect the farming heir, the estate plan should have a clause for premature death of the parents, advises Nancy Schmidt Roush, partner at the Shook, Hardy &; Bacon law firm in Kansas City, Mo. This should include a long-term purchase agreement for the cattle and business assets and a long-term lease for the land.  Including the purchase agreement and the lease in the estate plan makes them assets of the estate. As long as the farming heir adheres to the payment terms, both remain in effect. This gives him or her more time to purchase all of the business assets.

If, on the other hand, these agreements are only detailed in the business-succession plan, and the estate plan divides the estate equally among four children, the farming heir quickly becomes a minority owner. And, given the small ownership stake, the farming heir may be unable to secure a loan for the amount needed to buy out the siblings and still cash-flow the business.

2. Improper business structure

How you structure the business also affects what you can do in an estate plan, explains Neil E. Harl, Charles F. Curtiss Distinguished Professor in Agriculture at IowaStateUniversity. Parents must look at how they have structured the business and then carefully consider if that structure could become a limiting factor in their goal of passing the dairy on to the next generation.

For example, producers often place all of the farming assets into one business entity. But then, in the estate plan, parents give equal ownership of the business to all of the heirs. Therefore, the children who are not actively involved in the farming operation now have a say in the day-to-day farm operations. This makes it difficult for the farming heir to run the business effectively. 

Another drawback to this type of business structure is that it increases the time it takes for the farming heir to gain majority ownership and, therefore, controlling interest of the dairy.

"You don't ever want to make non-farming heirs partners in the farming or dairy operation," stresses Dunteman. Doing so creates a natural conflict, because the non-farming heirs normally don't want to spend any money on the business. They just want their money out of it, and generally the sooner the better. This conflict can make it nearly impossible for the son or daughter taking over the dairy to succeed.

To avoid this problem, Harl recommends that the land be placed in a separate business entity or held separately in trust. And, remember, when dividing up the assets in your estate plan, non-farm heirs make good landlords.

3. Problems with paperwork

Another problem occurs when the paperwork needed to implement specific aspects of the business-succession plan goes unfinished, explains Dunteman. For example, a father and son may have talked about executing a buy-sell agreement, including the terms of sale and valuation of the assets. But, if the buy-sell contract is never completed, the son has no way to exercise that agreement. (A buy-sell agreement is a legal contract between members of a business entity that details the rights of the surviving owners of the business in the event of a death, retirement, disability or the unplanned departure of a business owner.)

In some cases, it's the estate plan that is written, but never executed.  

Another problem occurs when incorrect wording changes the parents" intent. For example, the parents may have intended that Farm A go to their son and Farm B go to their daughter. However, when the estate plan was written, it specified that both children would receive equal shares to both farms in "joint tenancy." In other words, each would own half of each farm. And, when something is owned in joint tenancy, it does not pass to the children of either owner; it passes to the surviving owner. Another complication with using joint tenancy is if one child dies before the parents, the arrangement might give the farmland at death of the parents (or surviving parent) to the surviving child, which might not be what the parents wanted at all. All the more reason, says Harl, that you need to have a lawyer involved in drafting a will, trust or other formal document.

In this particular case, the estate plan needed to specify that Farm A would go to the son and Farm B to the daughter.  

Takes a team approach
Most farm families tend to complete a business-succession plan first, and the estate plan comes later. That's fine, as long as the goals of the parents are known. When you know what the parents want to achieve up-front, the business-succession plan will help you create a road map to insure the future of surviving owners of the business.

The business-succession plan and estate plan should be intertwined. 

That's why it is so important to take a team approach. At a minimum, your team should include a lawyer and an accountant. Then, consider adding a financial planner, a life-insurance agent, and a bank trust officer or lender. Inform the team members of your goals. Use their expertise to ensure that your business-succession plan and your estate plan mesh with one another and carry out your goals.




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