Making decisions about how to distribute an estate that a client has spent a lifetime accumulating is difficult.
When that estate includes a family business in which only some family members are involved, those decisions are more complicated. When that business is a family farm, a business that tends to be heavy on high value but illiquid assets (substantial acres of lands, expensive machinery and equipment, and large numbers of livestock), low on cash flow, and saturated in the sentiment of potentially multiple generations’ worth of blood, sweat, and tears, those decisions can be overwhelming.
Bridget Finke, U.W. 2000, is an attorney and owner of Valley Crossing Law in Baldwin. Raised on a dairy farm in Marathon County, she now serves farm families from the Chippewa Valley to the St. Croix Valley with their transactional legal needs.
Dividing the decisions between the disaster plan and the succession plan can help simplify the farm transition process.
The disaster plan addresses what happens if the senior generation dies tomorrow. The disaster plan focuses on the estate plan, whether that is a simple will, transfer on death designations for real estate, or establishing a revocable trust, as well as powers of attorney and a marital property agreement.
The succession plan addresses how the farm will be transitioned over time to the next generation. The succession plan may involve formation of new entities, buy/sell agreements, life insurance (and irrevocable life insurance trusts or ILITs), gifting, sales for less than fair market value, installment sales or land contracts, and often a combination of a variety of those tools. Succession planning raises the often more difficult issues, such as:
- Retirement income (particularly if the retiring generation has viewed the farm as their sole retirement plan);
- Transition of management and control;
- Gifting; and
- Sales for less than full fair market value.
A significant challenge to the succession plan continues to be how to pay long-term care expenses, particularly when long-term care insurance is not available.
Divide and Conquer
Unfortunately, there is no one-size-fits-all answer to “keep the farm in the family.” Achieving that commonly held goal involves a host of issues, including:
- Providing the retiring generation with financial security in retirement, including adequate retirement income;
- Planning for payment of long-term care expenses for the retiring generation;
- Providing protection and certainty for the incoming generation;
- Transition of management responsibility and control between the retiring and incoming generations;
- Determining what a fair (not necessarily equal) distribution of the farm and total estate between farm and nonfarm children; and
- Communicating the plan to all family members to minimize surprise (and contest) in the future.
Separating the disaster plan from the succession plan can help the clients narrow the issues and effectively make decisions and help the lawyer and the client accomplish tasks through the process. Tackling the disaster plan first can be an effective place to start. The disaster plan eliminates the concerns about ongoing income, long-term care expenses and giving up control and simply asks the client: if you died tomorrow, how would you want your assets distributed? Clients are often willing to be more generous in gifts at death, knowing they won’t need the assets for their own living expenses, than they would be in gifts during life. Additionally, unlike gifts or sales, which cannot be “taken back,” the disaster plan can be adjusted over time as circumstances change.
Even the disaster plan can be broken down into smaller components, such as starting first with powers of attorney and perhaps a marital property agreement. Those pieces will be needed regardless of the path the balance of the estate plan will take (for example, a will-based plan or a revocable trust plan). Completing these smaller tasks can give the clients a sense of accomplishment at having crossed at least one item off their overwhelming list. The lawyer can accomplish two goals in one meeting – such as signing the powers of attorney and continuing the discussion of a will versus a trust.
Continuing the Process
Working through the decision process on the “some day” disaster plan can feel less committal and final than the idea of gifting cattle or selling stock in the family farm corporation and giving up control right now. Starting with the disaster plan builds confidence in the clients’ ability to make decisions, comfort for the incoming generation that mom and dad are doing “something” and opportunity to the lawyer to continue to build a relationship with the clients and better understand their unique challenges.
Once the disaster plan is complete, the challenge becomes keeping the clients engaged in the planning process, shifting to the thornier issues of income needs, financial stability and income tax. If the retiring and incoming generations become joint owners of assets or business entities, planning will extend beyond the estate plan of the retiring generation. Instead, planning for disability, disagreement, divorce or departure for both generations will need to be considered. And, of course, the succession plan may end up necessitating changes in the disaster plan.
Transitioning the family farm is not a single task to be completed once a generation. Instead, transition is a constant journey with checkpoints along the way. Dividing and conquering can help you and your clients successfully navigate the farm transition process.