Retirement is not an easy decision to make. Most farmers and ranchers have been farming most of their lives, and just the thought of retiring from the work they love is difficult.

Once you’ve crossed that hurdle and decide to retire, what do you do with the farming business? One way is to sell to an unrelated individual or corporation, take the proceeds, pay the appropriate taxes and live on whatever is left. However, most farmers will take a different route and leave the business to the next generation.

The vast majority of farming businesses are family owned-and-operated. They have been passed on from generation to generation. I recently received a phone call from one of our farmer clients who is on the verge of retiring. He was looking for ways to transition his business to his children, who are interested in taking over the farm, with minimal tax consequences. He also wants to have enough money to live comfortably during his retirement years and have some left over for his other children when he dies.

Our client’s requests sound reasonable. After all, aren’t these some of the goals we all try to achieve during our lifetime? We work to provide for our family, to be financially secure and leave something to our children when we die. After several meetings and additional advice from other professionals such as bankers, lawyers and financial brokers, we came up with a succession and estate plan that met all of his and his family’s needs.

Having a sound succession plan and estate plan is essential in preserving the wealth you have worked hard to accumulate, and now is the time to get started.


Succession planning

Succession planning is important because it allows older generations to transfer ownership of their business to whomever they choose. A sound succession plan will be different from one family to another. There is no standard form to follow because every situation is different. However, a sound succession plan should address, among other things, the following:

  • Family relationships – How do you treat each child fairly, especially when one wants to continue the business and others do not?
  • Legal – Each state will have different legal requirements when transferring assets.
  • Financial – What are the older generation’s financial needs when they retire?
  • Taxes – Most business transactions will have tax implications.

Estate planning

Estate planning is important because it allows your assets to be distributed the way you want them distributed when you die. An estate plan starts with a will and a living trust.

A will is a set of instructions of how your assets will be distributed upon your death. I know what you are thinking: Creating a will is equivalent to an estate plan. Done. Sorry, but not done! The creation of a will alone doesn’t avoid probate. That means your assets will have to go through the court-supervised probate process. This process can sometimes be long and costly. Also, information under the probate process is public record and can be viewed by anyone.

In addition to a will, you should also have a living trust. A living trust works similarly to a will, but the main difference is that it avoids probate. A trust is a legal entity that can own assets and be controlled based upon your wishes. Creating a living trust is more involved than a will. You will need to properly fund the trust by legally transferring ownership of your assets to the trust.

It requires that you appoint a trustee or trustees who will be in charge with handling those assets based on your wishes. The living trust document should answer the 3 W’s: who, what and when. Who are the beneficiaries? What are they entitled to? When should they receive them?

The living trust document will include provisions that will minimize your estate’s tax liability. Estates are generally taxed at a top federal rate of 40 percent of the assets’ value at the time of your death. The estate tax exemption is $5,430,000 for 2015 and is adjusted yearly for inflation. The estate tax exemption is the value of assets that anyone can leave to their beneficiaries, excluding charitable organizations, tax-free upon your death.

If your estate is greater than the estate exemption amount, you might want to think about decreasing the value of your estate. There are various ways to do so. One is to take advantage of the annual gift exclusion. The gift tax exclusion is $14,000 for 2015 and is adjusted yearly for inflation.

The gift tax exclusion is the value of assets that you can give to anybody, excluding charitable organizations, tax-free. Anything in excess of that, you will be required to file a gift tax return, and you start using up a portion of your estate tax exemption. This is not always a bad thing, especially when you are gifting assets that are appreciating in value.

There are four components to a sound estate plan. The first two are mentioned above: creation of a will and a living trust. The last two is having a power of attorney and medical directives. A power of attorney allows someone that you appoint to act in your place when and if you become incapacitated. A medical directive allows someone that you appoint to make health care decisions if you are unable to do so yourself.

The topic of retirement and death is often difficult for some. It reminds us of our mortality, that someday we have to leave what we love doing and face the inevitable subject of dying. It’s not a matter of if it happens, but rather when. When that time comes, wouldn’t you want to be prepared for it?

Having a well-executed plan has all of the upside. It will generally save time and money in the long run. Being proactive rather than reactive will generate outstanding results. It will lead you to the direction you intended to go rather than others interpreting where you want to go. However, a plan is only as good as when it was created. It should be revisited regularly and changes made where necessary to adjust for the ever-changing situations.

If you don’t have a plan yet, what are you waiting for? Start one today. Create a plan today so that you can be ready for what tomorrow will bring.  PD

Ralph Lizardo