Succession Planning for
Farmers, Ranchers &
Vintners
April 2, 2013
Presented by:
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
C. Dennis Brislawn, Jr. J.D.
Principal in The Private Client Law Group
Member of a Washington Pioneer Family that
homesteaded in Omak & Sprague (Wheat Growers)
25 years as an estate planning attorney with
experience in family business transitions including
Farms, Dairies, Forest lands and Vineyards
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
Farm Family Issues
• I/we Love the Land
“Never sell my land!!”
• Accepting that Equal is not Fair
 Equity vs. Control
• Family Communications
 Do the kids all want/need the same thing?
 Should they?
 Can they?
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
Big Farm Family Issue
• “Exit” can be a planned
or an unplanned event!
• What “Value” Does Our
Farm Have to Players?
– Heirloom?
– Investment?
– Commodity?
• What Should We
think about?
–
–
–
–
Cash Flow
Fairness
Risks & Rewards
When to “Let Go”
Bundle of Property Rights
Right to Harvest
Sell Develop
Or Subdivide
Access
Exclusion
Water
Rights
Right of Use
Bill & Mary’s Story
Pasture of Perfection
Dairy Farm Family
• 3rd generation, same land
• One kid involved in
business, lives on farm,
has grandchildren
• One kid, professional, in
city, has grandchildren
The Kids Today
• Susan is a “gem”
– Dependable
– Good with money
• John loves the farm
– Good with farm; can
make anything grow
– Not so good with
business
– All like John
Bill and Mary’s Farm Plan
• Estate of $2,000,000
• Retired & Secure
• Goals Met
–
–
–
–
Preserve Farm
Care for each other
Cut hassle & taxes
Help kids, keep peace
How Did They Get Here?
Three Phases of Planning
• You are healthy.
• You are legally incapacitated.
• You have passed on.
What should my plan do?
1.
2.
3.
4.
5.
6.
7.
Protect Your Life Savings
Apply Assets for Your Benefit
Keep You in Control
Keep you retired!
Preserve Assets for Your Heirs
Fulfill your legacy
Produce Peace of Mind!
First – Adopt a Process
Financial
Goals
BUSINESS
PLANNING
ESTATE
PLANNING
The Three Liability Dragons
 Catastrophic Risk
 Loss of Control
 Income and Estate
Taxes
Scary Facts
• We are living longer and saving less.
• 3 out of 5 people over 65 will spend time in a
nursing home as a result of being incompetent
• Up to 65% of nursing home residents spend their
entire life savings within the first 12 months
• Millions of lawsuits are filed in American courts
each year
• 7 of 10 people have no estate plan
• You get one chance to get it right… Is a plan
just a document? Or does it take some time
and careful introspective thought?
Some Business Facts
• 80% of all U.S. businesses are family
owned or managed
– Accounts for 50% of the employment in the
U.S. and the GNP
– 30% of family owned businesses survive
past the first generation
– 15% survive past the second generation
14
Small Business Succession
• Conflict among family members accounts
for 60% of succession failures
• Heirs who are not prepared to manage the
business are 25% of the failures
• Only 10% of failures result from taxes
… and you worked decades for this.
15
Second – Business Plan
ESTATE
PLANNING
Financial
Goals
BUSINESS
PLANNING
Tools for Farm Success
Form of Business
• Landowner in business, and business will remain
after incapacity or death of the landowner.
• Asset protection is a key planning issue.
• Form of business will impact income flow and taxes.
• Most small farms will form as partnership, S
Corporation, or Limited Liability Company (LLC).
• Selection of a business structure should be done in
consultation with an attorney and accountant.
Comparison of Business Structures*
• Corporation
– C Corporation
– S Corporation
• General Partnership
• Limited Partnership
• LLC
*Make sure to discuss taxes, fees, etc.
Partners
GENERAL
• Control, gets share of profits, compensation
• Unlimited Liability Exposure
LIMITED
• No Right to Management, gets share of profits
• No Liability Exposure
• Limited Transfer Rights, Return of Capital Later
Limited Liability Companies
• Owned by members
• Managed by member or manager(s)
• Eliminates or minimizes corporate formalities
• Flexible tax treatment
• Disregarded entity (Sole proprietorship)
• Partnership
• S or C Corporation
Corporations
•Owned by shareholders
•Overseen by Board of Directors
•Managed by officers
•President/CEO
•Treasurer/CFO
•Secretary
•Vice President(s)
Review of Critical Documents
Articles of Incorporation/Certificate of Incorporation
• State Filing (Specific information)
• Business Name & Trade Names
• Resident Agent/Agent for Service of Process
• Business Purpose
• Capital Structure
• Voting Rights
• Indemnification
Review of Critical Documents
Corporate Bylaws
•State Specific (to a degree)
•Corporate Governance
•Board of Directors
•Statutory Officers
•Voting Rights
•Indemnification of Officers and Directors
Review of Critical Documents
LLC (Operating) Agreement
• State Specific (to a degree)
• Entity Governance (Member vs. Manager)
• Designation of Officers (Optional)
• Member Rights
• Democracy or Dictatorship?
• Concerns re Applicable Restrictions?
• Business Purpose
Consider Exit Planning
“Exit”, “succession”, or “transition” planning is the
controlled transfer of the farm to someone else.
 Consider that without a plan…






You can mess it up.
Family can mess it up.
Partners can mess it up.
Employees can mess it up.
Cash flow can mess it up.
Taxes can mess it up.
Third – Estate Plan
ESTATE
PLANNING
Financial
Goals
Business Planning
The First Dragon
 Catastrophic
Risk
Creditor Claims
•
•
•
•
•
•
STRESS !
Loss of Privacy
Delays and Hassle
Attorney Fees
Accounting Fees
Court Costs
Types of Claims
• Officer/Director Liability
(Corp.)
• Employee Suits
• Business or
Professional Liability
• Divorce
• Tax Liability
• Creditor Lawsuits
• Vicarious Liability for
Other People
• Partnership Liability
• Car Accidents
(Elderly?)
• Unknown Claims
– Product Liability
– Environmental Liability
How do you mitigate
catastrophic risks?
•
•
•
•
Catastrophe
Odds
House fire:
Auto accident:
Medical event:
LTC
Risk 1:1200
Risk 1:240
Risk 1:15
Risk: 1:2
Insure ?
Yes
Yes
Yes
Yes
DO YOU PAY OR DOES AN INSURANCE COMPANY?
USE OTHER TOOLS TO ENHANCE INSURANCE…
The Second Dragon
 Loss of
Control
Losing Financial Control
• Financial Loss of Control
– Adequate income now?
– Adequate principal now?
– What about the future?
– How do I analyze my current and future
needs and compare to my “plan?”
– How do I protect myself against the
unknown?
Protect the Business “Engine”
This is business “succession” or “transition” planning




Transfer of the property or operation to another.
First priority – Landowner & family considerations.
Second priority – discussing decision with others.
Third priority – establish the right legal tools.
Note: Tax considerations may be important.
Losing Legal Control
(Disability)
• Guardianship is a “Trial”
– Public Proceeding
– Court decides what is “best”
– Can be Humiliating
– Inter-family strife and dissension
– Costly in terms of money, time, emotions
Durable Powers of Attorney
• Inexpensive
• BUT Generally Give Absolute Power
– Blank Checkbook for ALL Property
– Few Instructions, If Any
– Financial Institutions May Refuse
• Easy to Abuse
Losing Legal Control
(Death)
• Probate is a “Trial”
– Public Proceeding (?)
– Court oversees settlement
– Provides a Forum for disputes
– Arguably costly in terms of money, time,
emotions
– Many estates are not well-planned
Option – a Living Trust Plan
• Retain Control
• Disability Plan
– Detailed Guidelines
• Distribution Plan
– Avoids Probate(s)
– Retains Privacy
– Detailed Guidelines
• Components
–
–
–
–
Funding DPOA
Health Care DPOA
Living Will
Limited CP
Agreement
– Trust (+/- Tax
Provisions)
– Pour Over Will
Lawyer’s Primary Tool Kits
• Revocable Living Trust
–
–
–
–
–
–
Customized Trust
Pour Over Will
Power of Attorney
Health Care Directive
HIPAA Waiver & Living Will
Property Agreement
• Will Plan
–
–
–
–
–
Customized Will
Power of Attorney
Health Care Directive
HIPAA Waiver & Living Will
Property Agreement
Lawyer’s Advanced Tool Kits
• Irrevocable Trusts (Gifts)
–
–
–
–
QPRT
Children’s Trust
Asset Protection Trusts
Dynasty Trusts, etc.
• Business Systems (Gifts)
– Family LLC or LP
– Buy-Sell Agreements
• Philanthropic Systems
– Conservation Easements
– Charitable Trusts
Estate Plans for Kids
• John’s Plan
–
–
–
–
–
Cotrustee
Primarily for Needs
Some now, later
Some for retirement
Asset Protection
features (marriage,
business failure, etc.)
– Runs the farm
• Susan’s Plan
– Elective Cotrustee
– Liberal Distributions
above Needs
– Asset Protection
features
– Has say indirect say
in farm
– Dynasty Plan?
The Third Dragon
 Taxes
Income Taxes
• Rates are High and may go higher
• “Inflation Tax”
• Fewer Deductions
– No “Fun” Write-Offs
• Hard to Pass Income to Other Family Members
Death Taxes
• Federal and State Estate Taxes
• Generation Skipping Transfer Taxes
THEY’RE STILL HERE!
Techniques for Funding
Estates Taxes
•
Irrevocable Life Insurance Trust or Others
 May be useful for meeting the estate tax burden
of an estate composed of illiquid assets
 May provide liquidity for buyouts
• Create New Family Business Entities
A Family Investment Company
LLC
Manager
(Entity?)
LLC
(Stocks,
Bonds, Etc.)
LLC 1 - Apt.
(Farm Ops)
LLC 2 - Land
Benefits for Family
• Bill & Mary keep control
• Bill & Mary receive management fee &
distributions
• Bill & Mary can share “fairly” with kids
– Management of estate is better through
training and succession
– Family income taxes may decrease
– Estate tax is reduced
Opportunities for Children
• Real estate partnerships
– If children own the operating entity, keep rents
low (to keep estate from growing as fast)
– Mechanism for giving of partnership interests to
non-active family members
• Operating partnerships
– Allocation of current earnings to younger
generation
47
More Opportunities for Children
• Withdrawals by older generation create
effective redemption of partnership interest
– Each year, the older generation’s percentage
ownership declines
• Gifts of partnership interests to children
while maintaining control
• Upon death, discounts available
• Leverage business loans to children
48
Reducing Estate Tax
•
Creative Use of Entities
 Defer Tax on a Family Business (6166 – deferral)
 Reduce estate tax by discounting… adjusting
value of the business as a “going concern”
Valuation Adjustments
• What is Your Company Interest Worth?
– Can’t be Easily Sold or Transferred
– Can’t be Pledged
– Can’t Demand Distributions
– Can’t Force a Liquidation
• Going Concern Value is Substantially
Less than the Liquidation (Asset) Value!
Valuation Adjustments
• Liquidation Value
– Is the Asset Value Desired by the IRS
– $1.00 of assets is $1.00 in share value
• Fair Market Value
– Is the Going Concern Value
– $1.00 of assets is $0.70 or less in share
value
Selling or Giving Assets
52
Family Business Planning
• Family Involved as an Economic Unit
• Elder Generation May Retain Control
• Investment Efficiency - Work a Plan
Family Investments
• Active Business
– C Corporation
– Sales Company
– Services Company
• Real Estate
– Apartment Buildings
– Raw Land
• Insurance
• Passive Business
– Public Stock
– C Corp Stock
– LP or LLC
• Cash
Techniques for Minimizing
Disputes
In all cases prepare a Buy-Sell Agreement requiring
the active children to buy out the passive children
and vice-versa.
• Puts and Calls
• Long term buyouts to not jeopardize liquidity
• Valuation with or without minority discounts
Equalizing Gifts Among Heirs
1. Create two classes of ownership
• The class received by the active children would have
managerial duties and would receive both a salary and a
distribution from profits.
• The other class would not have managerial duties and
would not receive a salary, but would still receive a
distribution from profits
2. Create two LLC’s
The Farm Operations LLC will be distributed to the active
farming children. The other LLC would own the farmland
and lease it on a long term lease to the Farm Operations LLC
• General Rule – Hackl Test
– Donee right to immediate use, possession or
enjoyment of property or income therefrom
– That provides substantial economic benefit
• Facts and circumstances
• Governing documents critical
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
Gifts of Interests in
Closely-Held Businesses
• IRC 2503(b)
• Must be “present interest” gift
• “An unrestricted right to immediate use,
possession or enjoyment of property or
income from property …” Treas. Reg. §
25.2503-3(b)
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
SALE OF LAND
•
Can sell various interests in the property.
•
May retain a life estate interest. Can do installment sale (cash flow, defer tax)
•
Requires market analysis of the property, including buildings and equipment.
•
Especially important for sale to one child if landowner has others.
•
Tax considerations for sale.
SALE OF ASSETS
• Capital gains or ordinary income tax
– Where might rates go?
• Installment sale benefits
• Increase in tax basis for depreciation
purposes for buyer
60
LEASE OF PROPERTY
Lease - Two forms: Crop-share or Cash Farm Lease
1.Crop-share = where rent is paid by a share of crops
produced.
2.Cash Farm Lease = traditional lease agreement.
a.
b.
c.
d.
To a third party.
Landowner retains interest in property.
Lessee receives right to use the land and to remove crops.
Lease should define acceptable use, water use,
responsibilities for care of the land.
TRANSFER OF DEVELOPMENT RIGHTS
Farmland preservation tool with significant potential to
provide added income to rural landowners, while meeting
growth management objectives for density in urban areas.
Right to develop property is part of the “bundle of rights” that comes with
property ownership.
This development right can be sold and separated from the property.
Local governments can allow for the transfer of the development right of
one parcel to another parcel.
Transfer of Development Rights
Whiteacre
40 Acres
Zoned Rural
Ag
1:5
Whiteacre
Deed
Restriction
Limited to 1:40
Right to develop
sold
City
allows
greater
density in
certain
areas with
rural DR
Developer
owns
developm
ent right
Developer
project
increases
density in city
area with TDR
Preserving the Land
•
Conservation Easements (share with public)
 Allows land to be preserved
 Income tax deduction/reduces estate tax
 Lifetime or testamentary
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
CONSERVATION EASEMENTS
Common charitable legal tool for the long-term protection of farm and
forest land… a transfer of part of landowner’s right to develop or alter
the land.
Provides immediate income to the landowner, income tax deduction,
estate tax reduction in some cases.
Rights can be parceled in many ways:





Right to develop
Right to graze
Right to produce crops
Right to harvest crops
Removal of valuable resources (i.e. minerals, timber)
CONSERVATION EASEMENTS
Examples:
 Easement to protect prairie habitat – may allow only
limited grazing.
 Easement to protect trumpeter swan habitat – graze
only at certain times.
 Purchase of development rights – landowner may
not build on or subdivide the property.
Fourth – Passing the Torch
ESTATE
PLANNING
Financial
Goals
BUSINESS
SUCCESSION
Bill and Mary’s Legacy
• Estate of $2,000,000
Their Story
• Retired & Secure
• Goals Met
–
–
–
–
Preserve Farm
Care for each other
Cut hassle & taxes
Help kids, keep peace
Tools of Farm & Forest Transfer
Estate
• Disability Tools
–
–
–
–
GDPOA vs. Living Trust
Health Care Documents
Liquidity Issues
Care Issues
• Death & Tax Planning
–
–
–
–
Will vs. Living Trust
Tax Exemption Planning
Remarriage Planning
Liquidity Issues
Business
• Entities
– LLCs
– Corporations
• Business Agreements
– Leases
– Management Contracts
– Buy-Sells
Special
• Conservation Easements
• Dynasty Protection Trusts
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
Tools of Farm & Forest Transfer
Financial Tools
Protecting the Land
• Agreements
• Charitable Leverage
– Land use leases
– Management contracts
• Sale
–
–
–
–
Selling to family
Selling to 3rd party
Value…
Rights
– Conservation Easements
• Income tax deduction
• Estate tax reduction
• Perpetuate land use
• Development
• Grazing
• Crop production, harvest
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
Interdisciplinary Approach
• Legal
–
–
–
–
Control Tools
Risk Management
Quality of Life Plan
Legacy
• Financial/Insurance
–
–
–
–
Resources
Financial Plan
Risk Analysis
Policy Reviews
• Tax and Compliance
– Tax Review
– Tax Reduction and
Deduction Plan
Call us if we can help
The Private Client Law Group
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com
PLAN FOR YOURSELF
… BUT NOT BY YOURSELF
5555 Lakeview Drive, Suite 201
Kirkland, WA 98033
(425) 803-9500 | office@brislawnlofton.com