Legal Considerations for Dairy Business Transition James R. Clark, Esq. www.pennaglaw.com
Transition Process 1. Protect Your Business Consider Entity Creation and Liability Insurance 2. Begin to Transfer Operating Business to Next Generation with Rental of Land and Current Facilities 3. Facility/Herd Expansion with Next Generation s Financial Buy-In 4. Transfer Land A. Lifetime Retirement, Income Tax and Financing Considerations B. Death Pennsylvania Inheritance and Federal Estate Tax and Financing Considerations 5. Liquidity Planning - Consider Life Insurance
Protect Your Business Risk Management Fire Insurance Liability Insurance Product Liability Insurance Umbrella Policy
Protect Your Business Choice of Entity Sole Proprietorship General Partnership Limited Liability Company (LLC) S or C Corporation Unlimited Liability Limited Liability
LLC Management and Control Manager Managed or Member Managed
LLC Operating Agreement Designation of Tax Matters Partner Restrictions on Transfer of LLC Buy-Sell Provisions Triggering Events Death Disability Incapacitation Other Option to Buy Option to Sell Determination of Sales/Purchase Price
Which comes First? Land or Cows? Transfer the Operating Business First Rent the Land; Transfer Land Later
Next Generation Transfer of Operating Business When should I start to transfer? How much should I transfer? Should I sell or gift? Should I finance the sale?
Before Real Estate Transferred Implement Lease for land and buildings Determine who is financially responsible for upkeep of buildings Consider Agreement of Sale to Purchase or Option Agreement Update Will to provide for transfer of farm at death Update Power of Attorney Decide whether to buy life insurance Insuring both parents? How much needed to cover debt, buy-out from Mother and/or siblings? How long do you need the insurance?
Expansions! Financial Buy-In from Next Generation Sign the Note Personal Guarantees from Members Personal Guarantees from each Member s Spouse Land Lease to Entity Entity owns the expansion
Transfer of the Land Parents Perspective Next Generation s Perspective Debt elimination Retirement income Fairness to all children Concerns about nursing home costs Loss of control Loss of identity Taking ownership Getting more control to implement ideas Taking more responsibility Becoming liable for debt Assuming more risk for less security Fairness to siblings
Transfer of the Land Tax Planning for Parents Capital Gains Tax Installment Sale 1031 Like-Kind Exchange Charitable Remainder Trust
Transfer of the Land Next Generation Financing Seller Financing Prepare Note and Mortgage Bank Financing Negotiation of Terms Review Loan Commitment and Loan Agreements Next Generation Farm Loan Program
Transfer of Land - Death Federal Estate Tax Pennsylvania Inheritance Tax $5,430,000 Exemption Spousal Portability Special Use Valuation - $1,100,000 40% Tax Rate 2012 Exemption Act 85 Business of Agriculture Farmland Other Descendants and Siblings 2013 Exemption Act 52 Qualified Family Owned Business 1991 Farm Valuation using Clean & Green ½ if Farm is Preserved
Thank You!