Heiser: Everyone needs a plan for the success of future generations on the ranch
Thermopolis – The importance of succession planning and estate planning was pointed out during the 2018 Young Farmers and Ranchers “Springing Upward and Outward” conference on Jan. 20 by Larry Heiser, a certified public accountant (CPA).
“How are ranchers, farmers and agribusinesses going to transition their operations down to the next generations?” Heiser asked. “Producers should look at what needs to be done or talked about early on when it comes to estate and succession planning.”
To start, producers should develop a succession plan defining how to transition an operation to the next generation, how to implement the plan and how to monitor the plan, Heiser recommended.
“We want to develop a plan but not be in the 85 percent of agribusinesses that don’t survive the transition,” he added.
The worst plan to have, he noted, is having on-farm heirs work for an operation their whole lives and only take over when the parents or grandparents pass away.
“That is one of the most dangerous plans on the face of the Earth,” Heiser stated. “As parents get older, they tend to think the on-farm heirs end up getting a better deal while any off-farm heirs don’t get compensated fairly, which interferes with continuing the operation to the next generation.”
Using gifts to pay on-farm heirs equitably is important and a great way to ensure on-farm heirs are compensated, according to Heiser.
“Most on-farm heirs are significantly undercompensated because operations can’t afford to pay them,” he noted, mentioning, in succession plans and estate plans, producers can look at what on-farm heirs get paid compared to what they should be paid and settle the difference using gifts, like ownership, shares and more.
“Gifting can’t be changed,” Heiser stated. “Many times, parents start feeling guilty, but gifting to on-farm heirs over a number of years means parents won’t need to feel guilty and change their estate.”
In terms of estate planning, Heiser mentioned operations need a business entity.
“For most estate plans to work with agribusinesses, they have to have a business entity to own the land, the operation or both, so shares or ownership can be gifted,” he explained.
When it comes to gifting, an operation with a business entity can have everything under one umbrella, so deeds, vehicle titles and brands don’t need to be changed, added Heiser.
“What type of entity works, though?” Heiser asked. “Each entity, like a limited liability company (LLC), limited liability partnership, S Corporation or C Corporation can all work in certain situations.”
He noted C Corporations are dangerous for agribusinesses because they have taxes inside the company and for individual shareholders.
“I’m a fan of LLCs, but everyone doesn’t need the same type of entity because there are pros and cons to each type,” Heiser stated.
Creating a business entity, said Heiser, holds the operation together and fits well with gifting, estate planning and legal planning.
“With everything in one place, ownership just has to be transferred to the next generation,” he added. “A business entity is a great tool when producers want to fairly compensate on-farm heirs and keep the business together in the future.”
Another important part of estate and succession planning, no matter the business entity type, are buy-sell agreements, Heiser stated.
“If producers don’t have a buy-sell agreement, they are making a giant mistake,” according to Heiser. “Basically, a buy-sell agreement defines the value of a company or business for when a shareholder or partner wants out, and all partners or shareholders must agree to the agreement.”
In a situation where a partner or shareholder wants out, a buy-sell agreement uses a predetermined formula to define the operation’s worth and allows a shareholder’s interest in the operation to be paid out over 15 years at a 2.6 percent interest rate, Heiser explained.
“Plus, the agreement also helps producers receive more discounts for gifting to on-farm heirs and in lawsuits,” he added.
For lawsuits, Heiser noted, if an operation has a buy-sell agreement and a shareholder, partner or the whole operation is sued, the accuser won’t be able to receive the full value of the operation.
“A buy-sell agreement is one of the most important things producers can do for their operations,” stated Heiser. “They work across the board in many aspects.”
According to Heiser, to pull all aspects of an estate and succession plan together, discussions with family and shareholders need to come first.
“It is critical that producers sit down and do a lot of talking to develop a plan that meets the needs of their family and operation,” he stated.
He added discussions about nursing homes and end of life decisions should be included because it is easier to discuss when parents are in their 50s and 60s rather than their 80s.
“Producers also need to pick a good team to help with their plans,” Heiser noted. “CPAs, if they understand estates and agriculture, are uniquely qualified to be the quarterback for producers’ teams, along with a good attorney and sometimes a life insurance agent. Pick the right team and implement the plan.”
He mentioned estate and succession plans are often driven by what’s happening with taxes at the time.
“I make sure to sit down with my clients every year to talk about taxes and where their estate plan is at,” Heiser concluded. “Estate and succession plans need to be monitored every year to be effective.”
Heather Loraas writes for the Wyoming Livestock Roundup. Send comments on this article to firstname.lastname@example.org.