Planning for Successful Operations and Succession

Transcription

1 Planning for Successful Operations and Succession Brenik Iverson, C.P.A. Odessa, Washington (509)

2 Planning for Successful Operations and Succession Operating Budget Tax Issues Families Risk Management Government Financial Planning Marketing Capital Budget Legal Issues Farm Size Estate Planning Transition Planning

3 Transition Planning Transition Planning How will the farm be operated in the future? Considerations What is your anticipated retirement age? Who takes over when you are gone? What needs to be done before you retire? Provisions for premature death or disability How many families can the farm support? How does your retirement coincide with the next generation getting started?

4 Succession Example - Background Mom & Dad are in their 60 s They have built a successful vineyard from the ground up They have 2 sons They would like to see the vineyard continue Most of their net worth is tied up in the farm

5 Succession Example Background (continued) Son #1 is in his mid-forties He lives on the farm and is integral to the operations He is married and has young children He is ambitious and wishes to take over the operations in the future He is concerned about Mom & Dad s future plans with the vineyard He has sacrificed personal income to ensure the farm s success over the past 20 years

6 Succession Example Background (continued) Son #2 is also in his mid-forties He does not live on the farm and is not involved in the operations He is married and has young children He has a successful career with a good salary and retirement

7 Succession Example Concerns & Goals Mom & Dad Would like to see the operations continue in the family Wants to treat both sons equally Want a secure income source for retirement

8 Succession Example Concerns & Goals (continued) Son #1 Concerned about being partners with his off-farm brother Doesn t want to grow the farm for his brother s benefit Rather, he would want to provide opportunities for his children Is concerned about a future forced sale brought on by his brother

9 Succession Example Concerns & Goals (continued) Son #2 Is not greedy, but wants his share of Mom & Dad s estate Would welcome any additional income Does not want anything to do with the farm operations

10 Succession Example Build a Plan Engage competent advisors CPA Attorney Mom & Dad s goals are top priority Communicate concerns & goals

11 Succession Example Reorganize Split the farm operations (a Business corporation) from the real estate (an Investment LLC) Allows separate transition plans for the two enterprises Gives the flexibility for ownership of the business vs. the investment Develop buy/sell agreements Protects on-farm heirs Fair to off-farm heirs

12 Succession Example Current Transition Bring in Son #1 as part owner of the operating entity Gives immediate ownership in operating entity to the on-farm Son Gives Son #1 the opportunity to reap rewards for successful operations Mom & Dad relinquish some control in order to get their feet wet in transitioning the farm

13 Succession Example Future Transition Mom & Dad transfers all ownership of operating entity to Son #1 when they are no longer involved in operations Mom & Dad s estate plan leaves the real estate LLC to the 2 sons equally Son #1 has the ability to leverage some of the real estate owned by the LLC This allows him to acquire his own investment property to be used in operations The LLC provides retirement income to Mom & Dad

14 Succession Example Future Transition (continued) After transfer of ownership to kids: The LLC buy/sell agreement allows Son #2 to enjoy his portion of Mom & Dad s estate via an annual income stream The agreement prohibits Son #2 from forcing a sale and taking away Son #1 s livelihood The agreement allows Son #2 to exit the LLC with a buyout at a discounted rate and on payment terms the LLC can afford

15 Succession Example Future Transition (continued) Buyout gives off-farm heirs an exit option On-farm heirs shouldn t have to sell assets to buy out off-farm heirs Use present value of future cash flows or discounted equity appraisal to determine price Mom & Dad will set these terms to prevent conflict among Sons Sons should respect that these are Mom & Dad s wishes

16 Farm Size Farm Size Determine the size of your operation Bigger is not always better Children moving back to the farm Will extra land be needed? Will more land mean more machinery and labor? Identify point of peak efficiency

17 Government Government Review current entity status Maximize government payments Structure for maximum insurance protection Maximize water limitations for growth

18 Tax Issues-Income Tax Tax Issues Begin with a professional (CPA) He must have knowledge of the farming industry. He is an integral part of your business Choose a tax structure C-Corporation S-Corporation Limited Liability Company Develop a written tax plan on an annual basis

19 Tax Issues-Other Tax Issues Self employment tax Individual farmers pay more selfemployment than income tax Would you choose to keep paying into Social Security? Alternatives to fund your own retirement IRA, Keogh, SEP IRA, Simple IRA Other payroll taxes Pay for land with non self employment income

20 Legal Issues Legal Issues Periodically review all legal matters Wills Durable powers of attorney Leases Stock purchase agreements Medical care directives Employment agreements Meet with attorney to keep up to date

21 Estate Planning Estate Planning What is the size of your estate? Anticipate future growth Prepare a market value balance sheet Review wills and other legal documents Who are the beneficiaries? Do you need to start gifting to reduce your estate size?

22 Families Farming Together Families Do you enjoy farming with your family? Does farming together improve efficiency? Most farms can be split easier than you think Usually operates more efficiently if they are split

23 Families Farming Together (continued) Families Find a solution before the family is fighting Plan for an eminent split Plan what needs to be done and when

24 Capital Budget Capital Budget Have a written plan showing additions and retirements of capital assets Use to plan equipment/crop rotations Helps schedule other events Land purchases Debt retirement

25 Operating Budget Operating Budget In the past, farmers made a budget only to get financing Today s farm manager realizes the benefits of a budget Most well thought out budgets are surprisingly accurate Gives a picture of the future financial path Helps identify problem areas Plans workable solutions

26 Risk Management Risk Management Covers all types of insurance Liability Crop Health & disability Property replacement Fire & hail Life Assess risk in each area Should every area be covered? Annual meeting with insurance agent Recap insurance policies Limits & reasons to leave limits as they are Premiums

27 Marketing Marketing Farmers that spend some time on marketing crops usually do better than those who don t Get a competent marketing advisor (not a CPA) & develop marketing channels Cooperative marketing personnel Newsletters DTN Consider tax implications Develop & stick with a written marketing plan

28 Financial Planning Financial Planning Plan for children s education Plan for retirement At what age will you retire? Will there be enough money to last until the second death? How much money will you be able to live on? Will your current asset allocation meet your goals?