Plan now for tomorrow’s family farm
Getting professional advice worth every penny
Author and time management expert Alan Lakein famously said; “Planning is bringing the future into the present so that you can do something about it now.”
And when it comes to family farms, having a viable farm transition plan could be the solution to “keep it in the family.”
Tommy Dollar knows well the value of having a transition plan and sharing it with trusted advisors. Before going in for emergency open heart surgery, February of last year, the CEO of Dollar Farm Products and Dollar Family Farms in Bainbridge called one of his trusted advisors. Dollar asked him to make sure the plan they had put together for succession of his business was carried out, no matter what happened in the operating room.
The assurance of knowing he had done everything possible to provide a smooth transition for his survivors—his wife, adult children and the 38 employees whose livelihood depended on the business—gave Dollar greater peace of mind.
Where’s the plan?
Transition and estate planning is low on the priority list, as farming families stay busy with the day-to-day activities of managing a farming operation, said Tarrell Bennett, Southwest Georgia Farm Credit’s Chief Lending Officer. Some farmers are also hesitant to spend money on professional advisors, like estate attorneys or tax planners, because of all of the other pressing financial demands.
But there’s another way of looking at it, said Dollar. “People will cost you money to get advice from, but as yet, I’ve never lost a return on my investment.” He said typically he sees 25 to 30 times a return after he’s applied their advice in his varied farm and ag-related ventures. “If you don’t spend any money to get good advice, you’re not doing yourself justice.”
The truth is, when someone dies, the family will need to bring in professionals to help sort things out. How much better to have advisors who are familiar with your assets, and who have heard your desires, so they can assist in preserving your estate.
Tools of transition
Dollar was only a boy of seven when he first heard his father talking to an advisor about what he wanted to happen to his estate when he died. His dad was only 38 at the time and in perfect health.
One of the lessons Dollar learned from his father’s advance planning was the idea of having a life insurance policy in place to help offset any taxes that might be due when the estate is transferred at death. Advisors say those taxes can be a shock to your heirs, as they can run as high as 40% for anything above the threshold on the value of your estate. And those monies are due within six months, which often sends beneficiaries of an estate scrambling to raise cash to pay Uncle Sam.
Insurance proceeds are not taxable and they have been a lifesaver for many farming families who have used them. “It’s an investment,” Dollar said. “You may spend $30,000 (in premiums over the life of the policy), but at your death, the estate gets a million.”
Bennett offered an example of how a policy might work: Say your estate, including real estate and business equity, is valued at $6 million and $4 million is sheltered. That means there’s $2 million in taxable estate assets your heirs will have to pay taxes on. “That’s when you need an insurance policy,” he said. If you don’t have liquid assets—proceeds from a life insurance policy or cash—then you must borrow the money and pay the debt service. Or, sell off acreage to pay the taxes. “That’s the scenario that scares you,” he said.
Presently, there is approximately in excess of an $11 million exemption; however, Congress can change the exemption amount at any time. At the time of a change, especially if the change is to a lesser amount, individuals may not have sufficient time to alter their plans for their estate.
Still, many people resent the idea of paying for an insurance policy that won’t benefit them in their lifetime. “I’ve had people tell me they saved a pile of money (in premiums)” said Dollar, “and I say, ‘Well, show me the savings.’” But they have nothing to show for it, he said. “What they have done is create an estate that will take on debt to pay the taxes—and their survivors will be servicing debt for the next 10 to 15 years to hold onto (the family farm).”
Another value of working with advisors is they can help you plan for business succession; preparing the next generation of producers. Dollar said he’s seen it time and again—farming families with no estate or transition plan in place when someone dies, putting the entire operation in jeopardy.
He also makes a point to ask young farmers he meets about balance sheets and often times, he hears that that side of the business—the business of farming—isn’t something they know about. They may be working in the family business, but know nothing about how to keep it afloat, if the matriarch or patriarch dies.
In Dollar’s opinion, not only are families not bringing in the professionals, they are not preparing the next generation by educating them on the business management aspects, because they don’t want to give up control.
“Doing nothing is not the answer,” Dollar said. “That’s not the way to have an estate plan.”
The way he looks at a transition and estate plan is that it ensures continuance of your legacy, your life’s work, for future generations. Most important, he said, “You’re giving the gift of reassurance, the gift of security to your family.”
Transition planning: Where to begin
Need some more information on how to start your farm transition plan?
Farm Credit University has developed an excellent workbook—a tool designed to help guide you through the process. If you’d like to receive a free copy, email us at LandFinancing@SWGAFarmCredit.com.