LEGACIES OF OUR LAND 2016
A monthly supplement to The Delmarva Farmer
Law expert offers ideas to ease farming transitions
DOVER, Del. — Have you ever been shown a green field, with the sweep of an arm, and heard, “One day all this will be yours!” Not unless it’s in writing, warned Paul Goeringer, University of Maryland Extension legal specialist.
Goeringer, discussed transition and estate planning at the recent Mid-Atlantic Women in Agriculture Conference
Sweat equity is not enforceable, he told attendees. It may create ill will between family members and you need to formalize the relationship and create enforceable solutions.
The majority of farms do not have an estate plan or transition plan, Goeringer said.
According to the Family Business Institute, 88 percent of current family business owners believe the same family will be controlling the business in five years, but in reality, only 30 percent of such businesses survive to the second generation and only 12 percent survive to the third generation.
Beyond that, survival drops to 3 percent. Note that these numbers are for all businesses, not just farms.
“Why so few?” Goeringer asked. One answer is the first generation makes all the decisions, failing to prepare the next generation. Another is succession plans are unclear.
Other reasons for failing generation transitions are family rivalries and insufficient capitalization.
Everyone needs a plan, Goeringer said, admitting he himself does not have one. His parents are gone, he said, and he is single.
In preparation for making a plan, assess where you are, including these factors:
What do you own?
What business relationships do you have?
What are your goals, your values?
Who are potential successors and others involved?
What is the financial status of the operation? Can it support two families, one in “retirement” and another still growing?
Goeringer said you have to determine whether you really have a business or is it just a collection of assets?
Another warning: Do not assume that you know what a family member wants. You have to communicate, and not just with your children. Communicate with all the stakeholders: Managers, investors and emotional investors. You may want to have a meeting with all the stakeholders. If so, keep the conversation to one topic: The family farm. Goeringer suggested not holding the meeting on a holiday. Hold it at a comfortable place, but not in someone’s home. Take steps to avoid distractions.
It may take bringing in an outside professional — an attorney, accountant, financial planner, banker or mediator — to get everyone talking.
Key components of conversation at that meeting should include who will be involved, whether new roles will be created and whether existing roles will change.
Think about ways to divide things.
If it is indeed a business entity, ownership of the farm resides in the entity which is owned by the heirs. Control can be given to an on-farm successor. How will off-farm heirs participate?
“Think about these things before meeting with an attorney,” Goeringer said.
He gave options such as conservation easements to potentially help equalize shares between farm and non-farm offspring. Cash from the sale of an easement could be used to equalize shares.
What if there is no successor to take over the farm? Do you sell the farm? Hire a manager? Or choose an outside successor? And, in the latter case, does that successor have the skills necessary? In any case, the relationship needs to be formalized, Goeringer said.
Transition planning is necessary but you still need an estate plan. It might include guardian nomination for minor children, beneficiary designations, powers of attorney for business and healthcare, an advanced directive for health care (“a living will”) and a will.
Goeringer listed pros and cons of wills.
The pros: you control the property until your death, you can direct who gets your property, you select the executor and guardians, and once the property is distributed, the will is no longer needed
The cons: A will must be probated (which takes time and money), it is easily contested (even with a no-contest clause), it takes time and public process and it is state-specific.
There are also pros and cons involving living trusts, he noted.
The pros: A living trust eliminates the need for probate. It is not public information. It is difficult to contest. You do not need a guardian to hold assets for minors.
The cons: There may be trustee fees. A trust adds complexity to asset management. It must be coordinated with other estate tools and … you still need a will.
One thing you might not have thought of is how all that data collected by farm equipment will be passed on. You also need to share all sorts of passwords, including social media, with the next generation.
“Implement, evaluate and revise,” Goeringer urged. “Communicate!”
You may want to revise your plan when there are changes in tax laws, or an occasion such as birth, death, marriage, divorce or disability or when there’s a major acquisition or disposition of property.
Many resources are available to help including online farm transition information from Oklahoma State University, the University of Minnesota and the University of Maryland. For the latter, visit https://extension.umd.edu/agtransitions.
1-800-634-5021 410-822-3965 Fax- 410-822-5068
P.O. Box 2026 Easton, MD 21601-8925