(765) 470-7090 polly@dobbslegal.com

Fairness and Strategic Considerations in Ranch Succession Planning

Ranch Succession PlanningI’m pleased to have been interviewed about asset transfer by The Angus Report in connection with a presentation that a colleague and I gave at the 2018 Angus Convention in Columbus, Ohio.  This interview can be seen here.  Below is an overview of a number of important fairness and strategic considerations that were discussed.

Who Will Continue to be Involved in Operations?

Transferring family ranching operations to the next generation in an equitable, tax-advantaged manner remains a concern for many family ranchers.

Fairness is not always easy to determine, as it may require considering a number of aspects that are not capable of an easy valuation.  In the case of ranching and farming, some children may have forgone more lucrative off-farm employment opportunities to build the value of the family operations, while their siblings pursued other employment or professional opportunities.

Determining the value of operations at the time of death and then splitting this value equally among all the children can be highly disadvantageous to the children who worked hard and sacrificed to build such value.  Many owners may want to consider “sweat equity” and similar factors into the “fairness” equation.

The succession of family farm and ranch operations that do not have children or other relatives involved can be especially tricky.  It may be the right fit for the farm or ranch operator to identify a non-related successor, who will work through the transition side by side with the retiring operator, with a buy out structured in a tax efficient manner.  There are options available to keep more cash in the pockets of the retiring operator, than if there’s just a machinery auction and sale of the last harvest – that’s an income tax nightmare

Estate Tax Considerations

Fortunately, from an estate tax perspective, it is now easier than ever to transfer assets to the next generation without reaching the limits at which federal taxes are applicable due to the recent increase in the federal limit for tax-exempt estates.  Upon death, up to $11.4 million (as of 1/1/2019) (scheduled to increase to $11.58 on 1/1/2020) will pass exempt from Federal Estate Tax. A married couple can pass $22.8 million free from Estate Tax. This more than double the exemption that was available in 2017.  These exemptions are part of the Tax Cuts and Jobs Act of 2017 (“TCJA”), and this temporary doubling of the transfer tax exemption is set to expire January 1, 2026, reverting back towards the $5.6 million per person, $11.2 million per married couple level (as indexed for inflation).  For those with sufficient wealth, provided an 8 year window to pursue planning opportunities that may be off the table in 2026. Who knows what will happen after 2025?  There are just over 6 years left to get something done (unless the laws change after the 2020 election)!

While the increased tax limit is undoubtedly helpful, such limit does not affect the basics of ranching operations transfer – how the assets should be transferred fairly to the next generation, especially when some of the members in the next generation are not participating in ranching operations.

Fair Doesn’t Mean Equal

While you may want to treat each of your children fairly in the distribution of your estate, this does not mean that the entirety of your operations should be split equally among your children.  There are many ways that an estate can be divided “fairly” without having to be split the estate “equally.”

As a starting point, if your children aren’t involved with the ranch now, it may be a terrible idea to include them in ownership or decision making after your death.  The recognition of who will (and who won’t) be involved in future operations can then serve as a starting point in the next important consideration – determining fairness in asset distribution.

What Do Your Each of Your Children Want?

There are unlimited ways to transfer wealth to the children or others who will continue ranching operations and to those who won’t be involved in such operations.  One of the best ways to begin a succession plan is by having conversations with your children to determine what their desires are with respect to an inheritance.  Those who may not be interested in participating in continued operations may appreciate a plan for a buyout of their interest, or a future stream of payments from some aspect of operations, or some other type of interest.  When the desires of the children are known, not only can this be extremely helpful in developing a solid succession plan around the objectives of everyone, but also in minimizing future litigation risk by quashing any unrealistic entitlement that may be brewing.  Don’t confuse this with “taking a vote.”  It’s your decision, not theirs!  However, this “taking a poll” phase of the planning is an important step, and may uncover wishes you didn’t know were held by the next generations.

Be Strategic – Develop a Plan Now, and Communicate the Plan to Your Children

You’ve worked your life on your farm or ranch, so consider your estate plan as drawing a “roadmap” as to what comes next to increase the likelihood your work can continue at the next generation.  I urge my farming clients to strategically plan now for asset division and distribution rather than putting off these important matters with the attitude of “let the kids figure it out.”

Unfortunately, many owners postpone the development of a strategic plan, and, as a result, their operations are left equally to their children, either through a simple will or by intestate distribution.  This often results in uncertainty, greed, fighting and disputes (often leading to litigation and costly legal expenses), and permanently hurt relationships.  A clear succession plan that is communicated to children can help avoid all of these matters.

Re-evaluate Succession Plans Periodically

With changes in the laws, the economy, and family dynamics, it is important that ranchers and farmers periodically dust off their estate plans to make sure that their plans continue to reflect their goals and achieve what that particular family has identified as fair.

Know Your Assets – Get an Inventory

Similarly, the ownership and value of farming and ranching assets are constantly in flux.  In order to determine a level of fairness in an estate plan, it’s important for owners to periodically assess the fair market value of their assets so that they can determine whether their estate plan continues to reflect the fairness they are trying to achieve based upon current asset values.

There are Many Possible Paths to Achieve Fairness

Succession planning offers many ways to achieve fairness.  A threshold issue is whether the children should co-own assets, or if separate assets should be distributed to different children.  For example, different parcels and buildings can be carved out and transferred to different children, which they wholly own instead of co-owning the whole with siblings.  Or the land can be kept together, in a trust or business entity such as a limited liability company, which all the children co-own, and which requires the land to be leased back to the successor of the farm operation.  I help clients review various creative strategies for to accomplish their goals and objectives and determine the right fit for each family.  It’s not one size fits all.

The Biggest Risk to the Ranch?  Litigation.

Lastly, when solid and comprehensive estate plans are built, the risk of litigation is minimized.  The more that owners understand the desires of their children and can build a plan around meeting these goals, the lower the chance will be of litigation.