Planning for Intergenerational Farm
Transition
Jesse J. Richardson, Jr.
Virginia Tech
jessej@vt.edu
Bob Parsons
University of Vermont
bob.parsons@uvm.edu
Women in Agriculture
PreconferenceRisk Management: Farmers as Food Systems Experts
Memphis, Tennessee
March 27, 2012
Introduction
• Transferring the Farm program in
Vermont
• Farm Transition Program in Virginia
• Brief points to remember with business
entities
• Advanced business entities
• Business agreements
• Conclusions
Transferring the Farm
• Series of workshops throughout New
England
• One day- attorney; farmer panel
• Videos: http://www.uvm.edu/farmtransfer/?Page=videos.html
• Virtual workshop:
http://www.uvm.edu/farmtransfer/?Page=ttf.html&SM=ttfsubmenu.html
Virginia Workshops
• Half-day introductions
• Full-day introductions
• 4-part and 5- part intensive (half-day, one
day-a-week, 4 or 5 weeks)
“The Magic LLC”
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Limited Liability Company is a separate legal
entity that promises one level of taxation and
limited liability
Is limited liability really limited liability?
Will a LLC solve all of your problems?
Getting an LLC because your neighbor has one is
not a good reason
People get hung up over the tool instead of the
goal
Forget about the liability and realize the flexibility
of the business agreement provided by LLC
Women’s Roles
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Census of Agriculture shows a huge spike in women as
“primary operator”
More daughters are the incoming farmer
Women likely to outlive husbands, will be making
decisions on own if not addressed earlier
Women more communicative than men
Women more likely to want equality in treatment of
children
Women very important in getting the process started
Advanced Techniques
• Combining entities can aid transition and
take care of off-farm heirs
• LLC owning land with another entity
operating business- separates returns to
land and returns to labor
• Should operating entity be LLC or C-Corp
Advanced Techniques
• LLC to all children and C-corp to child taking
over operation? Can use long term lease.
What happens to the next generation?
• Don’t worry about the next generation- Have
faith that they will work it out? Agreement
must be flexible, however, to allow for
change
• How is best way to enable on-farm heirs to
control use of the land while provide some
ownership to off-farm heirs?
Precautions
• Watch out for special state or local rules
• Watch out for quirky tax rules
• In New Hampshire, for example, when land is
transferred to an LLC, a 1.5% transfer tax must be
paid
• In Vermont, homestead tax law is unclear when
land is owned by an LLC. LLCs are not a people.
Conclusions on Business Entities
• Limited Liability is an illusion!
• With partnerships, unlimited liability is not
an illusion
• Get adequate liability insurance!
5 D’s and Business Agreements
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Death
Disability
Divorce
Disagreements
Disaster
Business Agreements- Control
• Should appoint a manager or managers
• May have officers/directors
• Responsibilities and expectations should
be clearly set out
Business Agreements- Control
• Two signatures required for checks?
• What happens if manager dies, leaves,
becomes incapacitated? (Wills and Powers
of Attorney don’t work here)
• Majority vote or supermajority for
member action?
Business AgreementsBuyout Provisions
• Set out formula for determining buy/sell
price- use book value or other easily
determinable number; keeps price down,
but must be evenly applied- no exceptions
• Set terms of buyout- installment purchase
over a number of years, reasonable
interest rate
• Use of life insurance to fund buyout of
deceased owner’s interest from surviving
spouse/children?
Business Agreements- Termination
• When and how can business continue if a
technical termination?
• If business terminates, how are assets to
be distributed?
Business AgreementsProtection from Divorce
• Limitations on transfer and ownership of
business interests; for example, only
direct lineal descendants of Grandma or
Grandpa can be owners (what about
adopted kids?)- keeps the outlaws OUT!
• Consider possibility of divorce when
crafting buyout provisions
Business AgreementsProtection from Divorce
• Installment sales
• Prenuptial Agreement is best way to
protect business from divorce
- full disclosure
- both parties represented by counsel
- no unconscionable provisions
Business Agreements- Disability
• Disability insurance for managers and key
persons
• Contingency plan in case of disability
Sample Business Agreement ProvisionOwnership
Restrictions on Ownership and Transfer.
Only direct lineal descendants of Jesse J.
Richardson, Jr., of Blacksburg, Virginia may
own an interest in this business. Any
transfer to anyone other than a direct lineal
descendent of Jesse J. Richardson, Jr. shall
be void and of no effect.
Exception to Ownership Provision
No transfer to anyone other than a direct
lineal descendent of Jesse J. Richardson, Jr.
shall be valid unless a 2/3 majority of the
owners of the business vote to admit the
new owner to the business.
Right of First Refusal
Sale of company shares. No share or ownership
interest in this company may be sold without
the seller first offering the sale on the same
terms and conditions to the company, then to
each shareholder. Written notice shall be given
to both the company and the shareholders. The
company shall have ten (10) business days to
respond to the right of first refusal. The
shareholders shall then have five (5) business
days to respond.
Setting the Purchase Price of the
Business Interest
Purchase of Shares of Deceased
Shareholder or Ineligible Owner. If a
shareholder dies or becomes
incompetent, or if the shares come into
the hands of an ineligible shareholder by
divorce or operation of law, the per share
purchase price of the shares shall be the
book value of the company divided by the
number of shares outstanding.
Terms and Conditions of
Company Purchase
Terms and Conditions. If the company
becomes obligated to purchase the shares
of the company under the provisiosn of
this agreement, the purchase price shall
be paid as follows: semi-annual payments
amortized over a 15 year period, at an
interest rate set at prime based on the
date the obligation was incurred.
Separating Ownership and Control
• Gift ownership units to off-farm and onfarm heirs
• Gift participating units only to the on-farm
heir
• On-farm heir holds all of the votes, thus
control
• If on-farm heir decides to sell land, offfarm heirs share the proceeds
Conclusions to Business Agreements
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Anticipate the unexpected
Plan for the worst-case scenario
Cover all your bases
COMMUNICATE
PLAN