Succession Planning Part 3: Examples of Specific Strategies to Transfer Ownership and Management to the Next Generation

February 15, 2021

Video Transcript

- Well, those that are coming in to the session, I appreciate your attendance at this third and final of our farm-succession programs today and featuring Roger Betz, District Farm Business Management Educator from the Southern part of the state. Welcome, Roger. - Thank you. - And really appreciate his insight and his sharing with us today on farm succession. My name is Stan Moore. I'm Rogers counterpart up in the Northern part of Michigan. Inside up in Belair Central Lake area and cover Northern Michigan for farm business management. So, today we're gonna hear about a farm succession. And again, this is our third session. You will be able to go back and get the PowerPoints and the recordings once those are finalized. Registrants will receive an email letting them know how to access those in the future. So, we are the session for that purpose. You'll notice up on your screen, just a little advertisement for obviously the sessions this week. We do wanna thank our sponsors of this year's program. They've really stepped up and made it possible for us to offer this at no cost to you as a student. So, we wanna express our appreciation to them for doing that. And because of their sponsorship, they've also allowed us to provide some college scholarships through that sponsorship. So, there is a link here on the website and John, if you could put a link in the chat, that would be great as well that you can go to and find out more about these scholarships. If you've got some young people that you know that might be interested please share it with them so. With that, I'm gonna share a short video. So, just a second, that a colleague of mine, Eric Karbowski put together. And we know that caring for crops and the animals creates unique stress and pressure that can be hard on farmers and agribusiness professionals as well in caring for one's own health and wellness in this high-stress profession is often overlooked. But it's just as critical and curing for the farm business. Whether those stresses come from financial issues or stresses of everyday life, MSU extension can help. - Hi, my name's Eric Karbowski and I'm a Behavioral Health Educator with MSU extension that focuses on farm stress with a farm stress tip. We know that farming is a physically-demanding occupation and oftentimes in rural communities, healthcare is not always readily available. I'm gonna introduce a term that might mean new to you which is psychosomatic pain. The term psychosomatic refers to physical symptoms that arise from or influenced by the mind and emotions rather than a specific organic cause in the body such as an injury or an infection. A psychosomatic illness originates from or is aggravated by emotional stress and manifests in the body as physical pain or other symptoms. Depression can also contribute to psychosomatic illness, especially when the body's immune system has been weakened as a result of chronic stress. A common misconception is that psychosomatic conditions are imaginary or are all in your head. In reality, physical symptoms of psychosomatic conditions are real and require treatment just like any other illness would. There are also social stigmas attached to psychosomatic illnesses, which might prevent farmers or the farming community from seeking treatment. Now that you have a better understanding of psychosomatic illness, I think it's important to note that this is not intended to suggest that your pain is not real or that you shouldn't access proper treatment. However, if you are experiencing some of these symptoms and concerns, it might be a good opportunity for you to do some self reflection and see if stress is playing a role with some of your concerns. I'd also encourage you to access the MSU Extension Farm Stress Resource website for additional resources and supports that might be available to help you and know that there are a number of people that are working very hard behind the scenes to support you as you support us. Thank you and have a great day. - All right, so if you'd like to learn more about farm stress, please join us on Friday, February 19th at 11:00 a.m for the session "Mending the Stress Fence." You'll find the zoom link and the passcode on the final schedule that was emailed to you. We're gonna turn it over to Roger. Thanks again, Roger for sharing with us about farm succession today. - [Roger] Thank you, I'm trying to get this (clears throat)to come in right this time. I keep goofing it up and goofing it up again. And so I want to share. Am I sharing right now? - Your blue screen is what we're looking at right now. - [Roger] Ah, okay, so I gotta do a new share. All right, so I gotta do screen two and the problem is I tried to make it big, before then, I lost all my buttons to push where I'm supposed to be pushing. - There we go. - [Roger] So now you can see the whole thing. And so if I go on the slide show and from current slide, I think that we're... There we go. Now we're goofing. Okay, well thank you, and I don't know what the overlap is of prior folks versus now, and so I assume it's pretty high. And so we're gonna go right out and keep on moving through and one of the things I wanna talk about was business organization structures and thank you to Franscia, she updated some of my slides, give me some nice colors and so forth to make this thing all work nice. So there are different forms of businesses that can be used. We'll go through this relatively quickly. As a sole proprietorship which is individual, and it can be a modified where we have some spinoff tape up where we have a wage incentive maybe to the next farming generation or a wage share based on profits, enterprise agreement, maybe the certain crops or maybe the steer enterprise on a dairy farm for example. There's different ways in which that can be done. A joint venture, you maybe buy a piece of machinery together but you're really two separate sole proprietorships, those kinds of things. Lease agreements for either machinery and or land are all different ways in which we can structure stuff. Partnership, typically we don't use those anymore 'cause of liability as a general partnership. You can also be at a limited partnership. And some of the senior partnerships a lot of times will convert those partnerships from our general partnership where the partnership is between two people, we make one of them limited, it might be the parent, it might be a brother who wants to slow down, where you kind of freeze those assets at a certain amount and they get a return, kind of like a rent income for the use of their equity in the partnership. We have limited liability companies which is a lot more popular today because of the liability protection that's offered supposedly through that structure. There's also limited liability person. So, it can be just one person to provide the same kind of protection. We have corporations where they have a Sub S, tax options where the tax passes through to the individual operators. We also have a regular C Corp where the C corp pays the the taxes in and of itself. We had a lot of those that were created back in the 70's because the were doing that as a way to minimize income taxes at the time. Those rules have changed a little bit and we've got some problems now with those C Corps if they've got a lot of land in inside the C Corp. For business succession issues, it becomes very complicated in terms of some of the estate planning operations with that. And of course, reality is, sometimes we use a combination of these different structures and the complexity of the businesses gets a lot higher. As we move from the left from a sole proprietorship into some corporations and different kinds of umbrellas and asset kinds of things with that. The degree of complexity is least on the left and more on the right, as we think through these things. So, let's move forward and think about how to make it work when most assets are needed by the farming heirs. This is a normal problem. So how do you do it? To make this happen I've used this particular strategy with lots of families over the years, and it does work, okay? Basically we provide options to buy to the farming heirs. These options to buy may be at a fixed value. The options to buy may have some terms, some financial terms attached to it. For example, there might be an option to buy. My son, Christopher, I can say to him, "Well, you've got the right to buy my farm land "at $3,000 an acre for the next 30 years or 40 years, "however long I live "and you can buy it either outright right now "or you can wait until I die. "And when I die, you can buy it from the estate. "You'll still get a step up in basis "as we talked about before the basis issues." And so it's an option to buy. It's not a first-right refusal. A first-right refusal would just say that fair market price, you got an option to buy is where you've got the right to buy it at some predetermined price. There's some, maybe if you pay rent it keeps that option active, those kinds of things. It's a very powerful tool that basically the farming heirs have the right to buy at certain prices that goes into the estate and then it comes back. That's my next point here is that the farming heirs buys from the estate at this fair market or discounted price which may be within this option to buy, and then that creates cash equivalents within the allocation of resources of the assets within the estate. They can be divided between all heirs, may be you got four or five heirs that can be divided out but the farming heir, they've got the right to buy this ground. My son, Chrsitopher, for example, at just $3,000 an acre maybe, could be other stuff on the machinery if he wanted to farm, or he wants to sell, whatever he wants to do or just own it type of thing. So we talked about before that you didn't really wanna farm farm's at a full-time basis but maybe as a retirement mode at some point in time. So, we have these cash equivalents. And then if the share back to farming heir is a smaller than the option, in other words, we divide this up and the land is still, even at this discounted value, is still a lot more than what the one half is or one third or one fourth, depending on how many children that you have, then they have to pay in or take on debt to pay over the time to equalize, okay? And so the it's like a jar. We put this value in at $3,000 an acre into the into the pot, it's probably worth 4,500 acre right now, maybe more with the irrigation time and so forth. And then you take that money, divide equally with this current value in the pot, divided equally amongst all the children, Christopher, my son will still get his one-third back. I don't have three children, but from our example, he gets one third back. But if his value of this land is still more than one third, he'd have to put in the difference of what he's got the option to buy the ground for versus what his share of the one third of all the assets thrown together into the pot. So he gets a really good deal in terms of the value of the land he buys it. And then he gets some of the money back if there's money invested in the pot more than what the value of the land is, or he has to put money into the pot in order to buy his share back from it. The farming heirs pays over time to the estate that then divides the money into the non-farming heirs. In other words, if the son is short, even with this discounted value, he's still short, well then he can be financed by the estate. He's got 10 or 20 years it could be 10 years with a balloon on the end. There's lots of ways in which that can be done. I'll illustrate a point, say we've got 2 million in assets with only a hundred and fifty thousand in cash and non-farming assets, okay? There's four children, okay? Four children for 2 million, that's what? That's 500,000 each one. And one of them has farmed with you for over 20 years. And so that's where you can do this in terms ... Well, let's go look this. We've got the example here now. And so here's the cash equivalents. Each child gets 500,000, would be the equal. And so the crafts, the inventory, the machinery, the buildings and trees, the land, we add everything up, there's $2 million. And so the farming son, Scott, well, he needs that crop inventory, he needs the machinery, he needs the buildings, he needs the trees or the land. And so we look at the non-farm assets. We can divide that amongst the non-farming heirs, okay? So they only got, of the total assets, they got the cash plus those non-cash assets for 50,000 each. Scott has 1,850,000, okay? So in order to equalize this out, what's Scott gonna have, okay? He's gonna have a debt instrument because he's only entailed the 500,000 of this. He's gonna have a debt of 1.3 million with his inheritance to get up to the 1.85 million. So what's his debt to asset ratio? Well, his debt to asset, he's gonna be 73% in debt to level to the state and 30 years, he's gonna have to pay $21,000 per sibling for the next 30 years, $62,000 is gonna, no, yeah, 63, 64,500 is gonna go to... He's gonna have in payments going out to the children. Okay, this will be equal. Well, is it equitable? Scott's been on the farm for 20 some years. Then Kathy, Randy, and Beth they didn't have anything to do with it, they've been offered their own jobs. They're growing up off the farm, those kinds of things, okay? So let's keep moving forward then. What happens if we do it where, instead of Scott kind of gets a little bit of a break on the thing and what he gets is that we not equal, but is it equitable is the question. So the non-farming kids can still get the cash, they can still get the non-primary assets. They get $50,000 but Scott's got debt instrumental he can buy the stuff for 950... Or he gets an inheritance for an extra $450,000 coming off the value of these estates. He had an option to buy, tape things with that. So he ends up being at 49% in debt. The kids end up... He gets the full $1.85 million worth of assets but he only has to pay 900,000 that he inherits. 950 is from the inheritance and he has to pay that back over time, two years within the payments only 14,333 per year per sibling and the payment maybe you can make that work with the 49% debt to asset ratio versus the 17% where it was divided equally, that's a plan that might be equitable. It's a plan that might work from a cashflow standpoint. It did not involve a whole bunch of expensive life insurance, those kinds of things. We just use the assets of the estate and then put a little bit of a discount onto the value, that Scott could could buy from the estate buy the assets and the children still get, the non-farming heirs, they get their cash plus $300,000 or of this debt instrument. And so their total inherit, I was turned around a little bit, each of the three non farming heirs ends up with 350,000, 50,000 in cash up front with the non-farm and the cash assets. And then a debt instrumental for $300,000 with Scott. And so they ended up with $350,000. Scott ends up with $950,000 of the estate and the debts to go with the non-farming heirs at a low interest rate, two and a half percent interest rates. He ends up at 49% spread over 30 years. And it's a plan that might work. We've used this strategy for a long, long time. One of the things that sometimes happens is the kids Kathy, Randy and Beth in it's good situation say "Why did Scott get such a good deal?" Well, one it's not their decision to make because it's the parents in terms of what they feel is as right and equitable in the whole plan. And so it's not their decision to make but it's... Sometimes we have a little bit of a deed restriction that says, "okay, Scott you got this 'good deal'. "If you turn around and cast this in for big bucks, "you make a big gain on it "within the next five, 10, 15 years. "You gotta share that gain back with your other brothers "and with your brother and two sisters. And so he's not gonna be able to walk away with a big windfall all at one time it just provides an opportunity for him to continue on with the farm operation hopefully within a reasonable palatable way for everybody and the non-farming heirs. He recognized costing on the farm. He's not able to really convert this into cash right away. So that may have process has worked a number of times with both people. So let's go into an actual structure now in terms of looking at the farm business and helping us think a little bit more about what's involved with the farm business where there's land, there's machinery, there's buildings there's crop inventory, fruit operations. We have perineal plants and trees to deal with and a livestock farm. Of course you have breeding livestock, and it's a a dairy farm or a swine operation or beef cattle or sheep. They have breeding livestock. And if we drag and draw a circle around this sometimes when we think about the farm, we think about it as the farm. And so, but if we start to break this into parts like this and think of each of these assets individually and maybe start talking about ways to transfer this stuff as these individual numbers versus the farm as a whole can so often to make that work for both the parents and for the children and to minimize taxes and come back to some of those goals we talked about. One more thing that sometimes we have is Goodwill and a lot of businesses especially get away from agriculture. There's a Goodwill issue. The Goodwill is because the farms up and going, maybe it's meat verified. It's a thousand cow operation. And so it takes a lot just to get that going. So the underlying value of that business is more than what the machinery and the breeding, and the cranial crafts and stuff. Here it's more typical than a insurance agency. That customer lists, that relationship, those contracts that you've got with those customers is the value of that business not the buildings or the office machinery those kinds of things. So a Goodwill sometimes does play into it. So let's think about this now. And so the green dot is the parent business. The red dot is a new business. That new business could be a partnership or an LLC between the parents and the children or the second generation. I don't wanna call them children but that's what we do to just to keep our head screwed on straight in the process. And so we started to think about our relationship and thinking about at this point in time the parent generations is in their fifties maybe 55 or so a younger generation is 25, 30 years of age someplace in that category. If we wait until age 40 for the younger generation that's often too late, their kids are pushing 10, 15 years old by the time that they're 40 years of age. And so the EMR necessarily saying, "man they're gonna be in high school "or out of high school and other four or five years "they're gonna be off to college in less than 10 years. "Heck they're gonna be done away from this and so forth." And so do I wanna take on a lot of new responsibilities and so forth. And I think that's part of why we talked about the parent generation or the first generation creates it. Second generation kind of maintains it, third generation kind of loses it. It's because of some of these reasons that we don't get that younger generation involved in the business soon enough. And so that's one of our things that we try to push for often is to get that younger generation financially involved in the operating business of the business relatively soon. So this is a method to make this happen with users with lots of farms this is not the only way. It depends on the size of business, lots of other issues in terms of trying to think this through but let's talk about this one as one method. And so we talk about the land who owns the land or the parent business owns the land. And it what's a younger newer business need to be? Again, that could be a 50-50 partnership or LLC structure with mom and dad or it could be the two younger sons or I've got a lot of daughters. I've got daughters and brothers they're in business together or just a daughter. I've got two or three farms where the daughter is taking over the operation versus the son. They don't have.. The red dot doesn't have enough money to buy this land but they sure could rent it and the parents sort of become more of a landlord role with that land and we have a cash rent, that cash rent can be anything you want to be well, I mean ends up being what it needs to be to make everything work. We'll talk a little bit more about that. What about the buildings? Buildings the same kind of thing that are owned by the green dot the parent generation, the parent business just a cash rent starting out cause they can't afford to buy and plus, those are attached to land, of course. How about machinery? Well, machinery is a difficult item. We won't get into all the other legal issues from an income tax standpoint, but in quotes we use a rent-to-own. Maybe if we got a hundred thousand dollars worth of machinery just for the illustration maybe the senior generation says, "okay, this red dot, the younger generation "you can rent this machinery for 10 years "at $10,000 a year." Okay, so we've got a hundred thousand dollars assets spread over 10 years, that's 10,000 a year. And during that time period, if you want to trade in that piece of machinery, the parents promised, okay, to give it to the children, okay? And so there a whole discussion about gifting and so forth. That's where this becomes important because maybe a hundred thousand dollar use combine that the parents wanna give to this red dot. The red dot uses that trade-in day to go buy another $250,000 combine. They got a gift for a hundred thousand for part of the trade-in value. And then they come up with $150,000 worth of cash or borrowed money in order to obtain the ownership of that new combine. And we do that process for 10 years and we kind of pick off the machinery that is owned by the parents and then has a lot of basis left in it. We leave that asset with the parents the stuff is all depreciated out. We'll kind of move that over to the new generation the new business 10% of it a year, of course as time goes on the stuff that they traded got used or what's left to 10 years now is not worth very much and so the parent business sells that machinery to the red dot for $1 of whatever's left, okay? And so we're using a combination of the estate-planning tools, income tax issues. The problem of course is that if you sell machinery or it's construed by the IRS to be sold machinery, that sale all takes place at one time and you cannot use an installment sale on machinery because the depreciation recapture. A depreciation recapture is to get what it's sold for versus what remaining basis is in it. And so you've got a live depreciation recapture that'll be taxable income the year of the sale, if it is a sale. And so we use our rent strategy spread out over 10 years in order to facilitate that, to keep it legal for an IRS standpoint. But there has to be understanding and it comes right back to Stan's point, communication in terms of how this actually works, okay? To help facilitate for the income tax issues for the parents to help minimize that income tax when we make this transition from the senior-generation business to this new business. If it's the operating businesses on 50/50 of course the gift is only 50% of the value because the parents own half the business in the red dot, then they're kind of giving it to himself and so that doesn't count as far as the value of the gift only ends up the percentage it gets transferred over. The red dot gets the expense for the rent that it pays. That ends up being an expense on schedule F, the green dot has rent income and it depends on how the business is structured. And some of those issues that ends up being rent income especially if it goes with the land or some IRS hoops to jump through with that. And so that machinery that rent, is rent income coming back to the parents it's a schedule F expense to the younger generation and the point is the schedule F income you pay self employment tax on, the rent income on schedule E, do not pay self employment tax. So every dollar that transfers to the business as a whole, the businesses, I should say we can save depending on task bracket it's all for 15.3% of self-employment tax utilizing the strategy. So it's a very effective tool. I've had to work with some CPAs to help them understand it. And especially the other problem is with your lending institution to help make sure they understand what's going on, who has collateral, who doesn't have collateral those kinds of things so that there are some hoops to make a jump through. But again, this transition is a ten-year process. I've had some of those goals as long as 15 years because of the numbers in terms of how they worked out and so forth. Okay, so let's move on to the breeding livestock and cows are really nice assets. And we talked about capital gains breeding livestock when you sell your cows or sell cows that are over two years of age, horses, sheep, pigs, sows, beef cows. Those kinds of things are all breeding livestock and subject to capital gains. As long as they were raised in capital gains, long-term capital gains tax rates which is very beneficial, the business who buys these assets, they get to take that off as a schedule F the expenses like the bought it. It goes on there on the red dots and the depreciation schedule. You can use an installment sale with this process and it does spread that gain out over time. You have a contractor, I've got several different firms I've worked with that. We create this installment sale contract. The principle as it's paid is long-term capital gains back to the parent business. The business down here gets to take that off as a schedule F expense on the depreciation. And as long as we maintain that cow inventory we've had that some court cases on this, as long as this operating business maintains that cow inventory we don't have any issue about this business taking the depreciation and the it's almost sales over a 10 year period but the depreciation is a five-year asset. As long as this operation maintains 500 cows or a hundred cows, or the what number is we've not had problems with the IRS in terms of this of their strategy 'cause it could be construed as too much with tax break. So that's a good deal. And these are really nice cows, okay? There are super cows. You might as well sell the young calf along with it as a cow-calf pair as part of this and installment sale? We can push some stuff within reason in terms of how much to push that around. Perennial plants and fruit trees are a problem because they're attached to the ground. It's kinda hard to move a big tree without doing a lot of damage to it. And so at least starting out, we do a cash rent. New plannings that are put in or put in by the new business. The old trees are owned by the parent business and we use a cash rent. As those trees are replaced over time we can adjust that it gets a little more complicated because of the obvious perennial plant trees and bushes I mean, blueberry bushes those kinds of things are similar issues but starting off with issues cash rent and as the red business puts in new plannings. We consider that to be owned and there's some risks there in terms of making sure that we don't get in trouble down the road in terms of people not understanding whose trees are what. I've got a farm like that, where we had a problem because parents died and there was a misunderstanding in terms of whose trees they were because it wasn't documented very well so that can create some problems. Okay, crop inventory. What do we do with that? The new business can buy. And let me be careful, I gotta listen very carefully on this now. So the parent business sells the crop inventory to the new business, okay? When is that taxable income? It's taxable income when the red business pays for it does everybody pay their bills on time? The answer is no. Not everybody pays their bills on time. So if the red dot does not pay the bill, what happens, okay? That happens is there's no tax where the events there ends up being an unpaid bill. And lots of people have unpaid bills. I've got a farm that we carried 1.5 million of unpaid crop inventory. We've carried now for over 10 years. And then the financial situation is such that the parent business basically just forgave that unpaid bill for that crop inventory. And so we moved $1.5 million worth of assets for over 10 year period to the new operating business by simply forgetting about what really happened, technically they had a gift. Okay, because of that, I have a sheet of the crops inventory and so forth when we transferred the business the right value was there and so it was a gift. Now who paid the income tax? The operating business, of course sold bad crop. The new operating business had the tax obligations but that became the income for the operating business to function, in terms of buying inputs for next year. All of those kinds of things we've used this strategy and it kinda raises some eyebrows but there's nothing wrong with it from a legal standpoint, what's the worst case scenario? It was a gift. Okay and that's why I understand these gifts and how the gift strategy works and so forth. It's so critical to understanding how we can utilize some of those tools in making this work. Sometimes the land rent may be a fair rent a lot higher rent and the crop inventory kinda ends up being gifted to the new business. And so it's way to move some of that income within reason instead of having a cheap rent we have more of a fair rent for the land, if you will and the crop inventory kinda moves over or it all depends on the financial situation of the business. It depends on the goals. It depends on the non-farming heirs. It depends on that communication that Stan talked about in terms of how all this stuff works and what's happening on the surface and what's happening behind the scenes. I've done this process now for a number of families. Mike Kelsey taught me how I do this back 35 years ago. And I've used it on numerous farms every year in this process and it works, okay? And it helps the facility the big problem is when the senior generation last retire. What's the problem? They've got this huge inventory sitting on the books that they'd not exposed income tax 'cause they had started the profit over the last 25 years or more longer. It's been built up pent up in this either unpaid crop inventory, is crop inventory in the bands, it's prepaid inventory of expenses. It's prepaid feed, it's all this stuff that we ended up delaying the taxes on paying that. And we're able to do that because of our cash accounting systems, but yet how do we get out of that ownership without creating a huge tax bill in the transition year sometimes we spread that out over two or three years I've got a large cash graph farm. And so we're trying to do now but it's still too big a numbers. They just create so much cash income when the parent business tries to kind of stop operations. And then what do you do with this inventory of assets? Operating loans and debts and so forth. You've got to work with that to make that process work, but the tax advantages and the ability to move those assets becomes very critical in this whole process. Okay, so we've talked about that. Let's go on a little bit farther. And why is this a red dot? It's a red dot because it's broke because of it pays full value on this cash ranch. For all these items, it pays for value for the trees. It pays full value for the cows. It pays a fair value for the machinery, which you could add on some the full be up payment more than what my example, I said 10,000 a year. In my example, that's what's an interest free loan effectively from a business analysis standpoint it's an interest free loan. So that's a pretty good deal for the younger generation that we may not use a full market value on the machinery when we do this, okay? And so what really the real world is, is that the green dot's gotta make some considerations to help facilitate this new business to get started. It has to start off with the full value of everything. There's no advantage of being within this family and so forth. Okay, we spend a lot of time on talking about what's assets. We've got the inventory, the machinery and the breeding livestock and stuff above the horizontal line here, okay? We got the personal assets. These are all personal assets, the real estate, the real assets so-called are down below. These things are fixed to the ground. And we have to do some more stuff to get this stuff done in the estate plans, okay. You have this whole business transition plan. So this estate plan and the business plan they have to work in constant with each other to make this work. So what are we doing? How do we get these important assets we've done? It's taken us 10 years to do this and just to get this stuff done. So it's not just done in one day. It takes some times we have this set up for 15 years, as we've talked about before, so what do we do with these other assets? Well, maybe we need to break some of this stuff up a little bit depending upon the size of the business kinds of things. One of the (indistinct)values is to try to keep this land together because the business is more efficient, has one a big operation versus broke up into smaller parts. For example, we have two that we had the farming heirs, the land and the buildings that are critical to the business. We had those go to the farming heirs. And that depends on my prior example the pieces are just too big. We've got to get some assets going to the non-farming heirs, okay? And so we have non-farming heirs. They've got some of their ground and it goes to them. And we got buildings that goes to the non-farming heirs as we've illustrated here, okay. I don't like this but sometimes we have to do it sometimes the work's out very nice because it's too much especially these farms get bigger and bigger and bigger and it is too much money, too much assets to just be transferred to the farming heirs. But we do need to have, then some relationships established between this new operating business and this land that's going to the non-farming heirs. They've got either along term rental agreements. So maybe there's a purchase agreement along with inheriting this ground this month or last month, rather, I had one of where in order for the non-farming heirs to inherit this they had to agree to be in an LLC that owns this ground together. And the farming heirs had the right to buy out the non-farming heirs with names listed and what the terms of those bios would be. If the non-farming heirs one want all those assets with a strong, strong goal of keeping the land together as one unit, in terms of the business trying to facilitate for a longterm at least another two generations that this land it has to stay together. So at the operating business, okay, can he can run efficiently with the size of the machinery they have, they've got way too much machinery to cut the ground in half. Those kinds of things to me have the efficiency that they have. And so we need to have some options to buy perhaps between the non-farming heirs and these long-term agreements. Okay and the farming heirs of course and they can have that. And then fruit trees, those are used to pain in the butt to be honest with you but we got to have same relationships in terms of the operating business owns hopefully the new trees that they put in over time. If it goes on for 20, 30 years they're gonna be all on new plantings anyways. And so it's not gonna matter that much except that ground below those trees. We've gotta make sure that goes to non-family areas as well. So this estate plan is a very critical integral part of this whole business succession in estate plan for the the successful transfer of these assets and for this new next generation to be in. If this business is a 50-50 operation the parents are half of this. And so the parents are maybe in their fifties and the kids are in their twenties. And we do this for a 50-50 on the operating side of the stuff we do this kind of rental agreements and so forth. And the operating the parents alone this stuff down here that's fine. But what if we do another 10 years down the road? And then mom and dad, or dad does want to retire? Well, we do this exact same process with the other half. We do our rent-to-own over 10 years, we sell the cows if there's cows, we do the exact same process with the other half of the assets that dad owns in this business here. We moved 100% `of his assets into here into this new business. Okay, that's a misunderstanding a lot of times we took these assets and moved them into this bit of a hundred percent of them but dad was still 50% ownership or a third ownership or 10% ownership in this business over here, okay? And that's a concept in terms of how it works. So let's go through an example now and this example of just saying, okay, this is really... Let me go back a little bit. I wanna go back, back, back, back. How do I go back? I don't have my bonds but here we go down here. Then we go back. If you think about control, control is always is a big issue who's in control of this whole operation here, this whole transfer? Is the red dot in control? No, not really, because what if the red dot doesn't give mom and dad nice enough Christmas present. And they decide to terminate this lease. Well, the red dots gonna be in trouble. Now, maybe we have some things in there like this option to buy or take stuff, which is ironclad, so that we're not just putting sugar on the process. There's some real meat in it and so forth but really this green dot controls an awful lot here. So the green dot... The point I wanna make here is the green dot has not given up control, okay? Because until this ten-year period is not like on day one, it's a 10 year process. Everything goes well they can start charging fair rent. And so there's this kind of rent. There's all kinds of ways in which this green dot is in control of the red down, okay? But at the same time we want this red dot to know there is a real future here. We're not just putting a sugar out to make it look good. The process is really happening at the same time. We wanna be flexible in case things go bad, economy and all those kinds of things, okay? So now let's look at this example here where it's at a different example, we've got $4 million worth of assets in this green dot and here's inventory machinery. We've got a cow/calf operation. We got some buildings. We got some land today it's worth 4,000 bucks an acre, okay? No trees, we don't have to be complicated with fruit trees and the blueberry bushes. So we do this example of where we move the inventory the machinery, the cow/calf pairs, okay. We move that top part remember this top part of this stuff up here we're moving that into this partnership. I'm gonna say a 50-50 LLC. And so he moved the inventory, move the machinery but the had the old machinery, 10 years now maybe it's worth half the value. And of course, as time goes on, hopefully this LLC is going to kind of replace that machinery anyways. But just look at what happens to mom and dad here, okay? And their control issue with this green dot that they got, okay? We do this all over 10 years. We get these assets moved over to here. We hope that these assets end up being worth more that the business grows, but I'm talking about just this original principal value of those assets to move them over here. The inventory stays the same with what mom and dad had and machinery is maybe worth half the value on this lease, the cow/calf pairs they're about the same. The buildings go where? The buildings, we haven't transferred the buildings and the land suppose that increases just 2% a year. So it goes up to a hundred, 120% over 10 years that's a fairly slow rate. And what's that value becomes 2.8 million but the old buildings still worth 300,000. The total assets, mom and dad still own 3.18 million 100%. And if they own half of the LLC and we started to add those numbers together. So here's half the LLC split that up between the parent and the junior generation. Here's the parents' assets. They've got the 3.18. It comes over here. We add up the total assets of what the parent generation of the original part owns and now what the junior generation owns. The junior generation really only owns 11% of this whole business. If we tuck in all the land and these buildings and mom and dad's equity is 89%, okay? And so the point is that even with this relatively aggressive, we've got all the inventory, all the machinery, all the cows, all their working assets, we get all this stuff moved. Now, hopefully the LLC grew again, I wanna emphasize that but all those original assets, mom and dad still have 89% of those assets. And junior generation only has 11% even with this aggressive plan that we have here, okay? And so that's the point I wanna make with that in terms of that tool and what it actually does to mom and dad's assets in this situation. It will need an estate plan, that's another whole stage of course, but that's just the business transfer and the first 10 years of this plan, everything goes to Hoyle. Okay, so let's go and look at this. So talk about flexibility. Well, as far as our goal four, all plans have ability to change as events may happen. Economic goals, disability is a very important one. What happens if junior ends up being disabled in the whole process. What happens if somebody dies? What back staffs, what a state plan is there buy, sell agreements under death? What happens to divorce happens? What happens if we have an enterprise change which is likely to happen, we add more cows. We change the crop mix, whatever. There's all kinds of things. Here's a killer right here what Stan talked about what happens if we have a falling out between family members, all of a sudden they all fight and they don't get along? We go back to the parents and go back to this plan here. So, if this process here this first 10 years falls apart, what happens? Well mom and dad still own all this stuff? And they still got equity within all this stuff even if they're 50% or even if there's 0%, okay. Who owns the notes? Who owns the machinery? Who owns the inventory? As mom and dad still have this inventory and accounts receivable. They've got it as an unpaid bill. Breeding livestock, how much principal and interest did they pay to own some of that livestock, okay? And say they have machinery, yeah, they may have some gifts but what is owned by this business on the machinery side? And so the point is that we have this falling out with the parents so they still got control. So my point in saying this, the reason I'm saying this is I'm trying to encourage the senior generation to do some stuff, okay? It's not gonna hurt you financially and without doing it and not getting real ownership and the opportunity into the younger generation I think as a mistake in most situations we have changed markets, consumers preferences obviously are changing. COVID could happen, what happens when COVID happens? Make sure you're plan can accommodate these scenarios. Compromise when discussing business structures and plans is absolutely critical. Simultaneously think about this. When you think about these six goals that we've laid out here, okay. Now I haven't listed out, we've got some more but the thing about we're trying to simultaneously train to achieve all these goals at the same time, need to be flexible to achieve an appropriate balance, go back to goal two and that's family harmony that Stan spent some very important time on. So, this flexibility thing is critical. We go back, keep it simple, need to understand how it works not every farm can be simple just depends on situation. We can use professionals to help us in thinking through those issues help us think to... It gets pretty complicated. It's kinda messy. When you start moving all those assets, you've got our rent-to-owns going on and purchase agreements. And some of that legality stuff to make the make that work these goals are conflicting with each other. So, priorities will have to be balanced while it's complicated it may be advantageous. It also must be feasible. And so my question to you is, does a plan like this facilitate you and your family to balance your goals and those goals being the financial independence of the senior generation, goal two is that family harmony. And we think so important. Does it provide an opportunity for the farm heirs? So they get started. Do they have an opportunity to gain that management experience? Are they actually involved in the decision making? Are they involved in trying to make the payroll work? Are they involved in buying the seed and the fertilizer? Are they involved in the FSA office? Are they involved with all those functions of management that Stan talked about? So we think this getting them actually involved in the business, some way, some how is a of spinoff it doesn't have to be together it can be separately but somehow getting them involved in real business ownership, real business responsibilities at a relatively young age to make the system work. Can it be flexible? Can we keep it relatively simple? And our last goal is to minimize income taxes. So what if we gain five, $6,000 or $10,000 of income taxes, but we're not achieving family harmony because of that, is it really worth it, okay? And so there's a balancing act of all these things to make all this work. How are we coming on time, folks? I lost my clock. - Hey, Roger, I think we probably should be wrapping up. I did see one question in the box that said can we review the feasibility slide? - [Roger] Wow, which feasibility slide? - I know we got the flexibility slide. I'm not sure about the feasibility side - Feasibility and we talk about that usually as pertains to financial projections and so forth. We try to talk a little bit about that in our first session this morning. And I know financially does it work? What's it look like on paper? We do a lot of work in terms of helping. We use our FINPACK tour, FINPACK impact software, and we say, okay here's how the business sits today. What would it look like if we started this other structure we add a new business entity in there. What's gonna be different? Who pays what bills? What's the internal stuff? How much is that gonna be? Does it provide enough income for mom and dad? All those kinds of things and as part of the feasibility issues At least from a financial standpoint that's also a feasibility issue. Do people get along? Okay, can they work together and so forth? That that becomes part of the how the testing stages is as well in this whole process. - Good deal, well, thank you Roger. Appreciate you giving us three hours of your time today to share that. - I just realized I didn't have my video on. That's all right. I'm better looking in my picture than in real life anyway. - Very sharp picture. So we would encourage you if you've got any questions to put those in the Q and A box. And we do have a couple of minutes for questions here. Also wanted to let everyone know that Florencio put in the chat box, the feedback survey link. We'd encourage you to go that to that. And when our session is done here, click on that and have it ready and give us your feedback. We appreciate that. (clears throat) I am gonna launch... Knowing that a lot of you are with us throughout the day today I am gonna launch this post poll. Just kind of see where he ended up at as far as ready to... Intending to create a succession plan for your farm. And did this session provide helpful information? We'll use that as a post for the three sessions that we did if you only attended one, that's fine too. We'd appreciate your feedback on the sessions today. So, as people are doing that, Roger, I did see a one come in to the Q and A second or third to the last slide. How about life insurance and living benefit plans for keeping employees and managers or specialized talent? - Sure, that's part of the package benefits, perception, so forth larger operations and got mobile employees, some of the benefits to health benefits, maybe for children as well. When I say children, I mean the children of the parents and so forth, the young adults and the second generation, those are all good things. It's all part of your compensation. And part of the maybe benefits of staying on the farm for the non-farming or for the farming heirs rather can be incentive they got. You may not have much cash to work with, to live on, I should say, but maybe they've got some retirement funds that are pretty good size and other kinds of things as well. I don't see the question myself but. - All right. There's one more in there, Roger. (clears throat) If a family member to estate is more valuable to the operation, how do you negotiate worth? Can you allocate responsibility, compensation or equity such as an employee ownership structure? - Yeah, I've got it up in front of me as well. There's a lot of different strategies that different people try to use. I've got one family in particular that happens to be dairy operation but they've got a sizeable dairy, a successful dairy. They had younger generation involved in the farm for a few years that kinda fell apart. They've had other employees being on the farm since early high school has been there every continuously since then, the younger guys in his 30's now. So he's been there for 20 some years and they are working on moving the ownership of the operating business to this non family member. They've developed a strategy to build equity in the cows and equity in the machinery to helpfully get that person to a point of where he could buy out the rest of the operating entity the working assets from the current owner they will be at a discount value to help facilitate because if he doesn't take it the old business is gonna have to go. It's gonna be stopped because there's no anybody else to take care of it. There's a good trust between the owner and the younger family member or non-family member. And so all of those are good things depending upon what fits individual people. And then if that work, it comes out of the discussions that Stan talked about of how important those discussions are in terms of looking at alternatives, looking at ideas testing those ideas, what palatable, what works for folks now becomes the important part of that whole discussion process with either family members or non family members in terms of ownership, responsibilities, those kinds of things. There's incentive programs and a net profit is how this farm wanted to do it. And then they have to decide how you gonna qualify and quantify that profit? So there's anything like that I think is as positive for this employee, employer business succession discussions. - Great, all right. Thank you very much, Roger. Can appreciate the sessions offered here today and thank you, Roger for your presentation. I do want to again, mention the in the chat box is the link to the session survey. So I appreciate your filling that out. Thank you for joining us. Do not hesitate to reach out to any of the-

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