Transcript What's It Worth If You Stay On The Farm

What’s It Worth If You
Stay On The Farm
John R. Baker
Attorney at Law
1-800-447-1985
[email protected]
Photos by USDA NRCS
NOT EVERYTHING THAT
CAN BE COUNTED COUNTS
AND NOT EVERYTHING THE
COUNTS CAN BE COUNTED.
Albert Einstein (1879 – 1955)
A Critical Difference
How we define “family”, the priorities,
expectations, relationships, and
measures of success in a family are,
and should, be different than the
priorities, expectations, relationships
and measures of success in a
business.
Identify Which System
• It is imperative that you know which
system is appropriate in a given situation.
• It is appropriate to behave as a family at a
holiday.
• It is not appropriate to behave as a family
at a business meeting.
If the ship-building art were in
the wood, it would produce the
same results by nature.
Aristotle (384 BC – 322 BC)
If a farm succession a were in the
assets, it would produce the same
results by nature.
John Baker (1947 - ????)
THE FARM
Owner’s priority
Owner’s priority
Continuation of farm family business
Continuation of family ownership of farmland
SUCCESSION
PLAN
Assets Money
ESTATE
PLAN
Management
BUSINESS
SUCCESSOR
HEIRS
In a 2006 Iowa Survey a
majority of farmers who had
an estate plan responded
that the best plan was to
divide the farm equally
among the heirs.
Equal is Fair. Isn’t it?
The worst form of inequality
is to try to make unequal
things equal.
Aristotle(384 BC – 322 BC)
“I’ve spent my entire life
paying off my uncles. Now
I’ll spend the rest of my life
paying off my brothers.”
English farmer, Devon, UK 2002
Dad and Mom have asked Sarah to come back
and eventually take over the farm family
business. They have offered Sarah an annual
salary of $52,000 per year.
Sarah has one sister and two brothers. None
are interested in taking over the farm family
business.
Dad and Mom have stated that they will treat
all their children equally.
Mom and Dad have told Sarah that she will
receive $250 per week and that each of her
sibling will receive $250.
Sarah, her sister and her brothers have been
treated equally.
Does this sound fair to you?
If it is not fair during the life of the owner
then what makes it fair after the death of the
owner?
KEY CONCEPT
Compensation = Contribution
Contribution = Compensation
•
•
•
•
•
•
•
1990 the owner has a net worth of $300,000
3 children: If divided then each receives $100,000
By 2010 the net worth has grown to $3,300,000
If no successor the each child inherits $1,100,000
One child is the successor
Contribution = Compensation
The Owner determines that one half of the increase is
due to the efforts of the successor
• Therefore, the owner’s share is $1,500,000
• Therefore, the successor’s share is $1,500,000
• The successor’s share of the Owner’s estate is:
– 1990 From the Owner’s share
$100,000
– 2010 Successor’s efforts
$1,500,000
– 2010 From the Owner’s share
$500,000
– TOTAL inheritance
$2,100,000
• Each Siblings’ Share of the Owner’s estate is:
– 1990 From the Owner’s share
$100,000
– 2010 From the Owner’s share
$500,000
– TOTAL inheritance
$600,000
Equitable Division of Property
• Equal is not fair.
• An equitable division allows the On-Farm Heir
to be compensated for the increase in the
wealth they have created and protected.
• An equitable division also gives the On-Farm
heir a greater chance of being able to keep the
farm.
Basics for compensation of the
On-Farm Heir?
• Time
• Market price of labor
• Value Added to Farm
• Preserved wealth
• Management
Case Study
The Miller family is a typical Iowa
family who own and operate a farm
family business and they want it to
continue for another generation.
Only one of their children is
interested in farming.
The Miller’s
• Denny and Mary: Farmers in Smallville, IA.
• Denny farms with his father, Tom.
• 3 children: Chris, Kevin and Kathy.
– Only Kevin wants to farm.
• Mary and Denny love all their children and
wonder how to divide assets when they are
gone.
The Miller’s: Part One
• Kevin is 21 and has a cattle herd of 10.
• He is in college and will finish this year.
• Since he hasn’t contributed to the farm, no
compensation is needed
• Equal division would be fair because
Kevin hasn’t made a contribution to the
business.
The Miller’s: Part Two
• Mary and Denny are 65.
• Kevin is 41 and is married to Grace w/ 3 children: .
• Denny and Kevin have been farming together for 20
years.
• Kevin makes some management decisions.
• 2,000 acres are farmed by Denny and Kevin.
• Their herds have grown significantly.
• How do we value Kevin’s contribution to the
farm?
Factors to Consider
1. What value has Kevin added to the farm?
2. What value has Denny added because he
knows Kevin is going to take over?
3. Has Kevin built assets on Denny’s land?
4. What amount should Kevin receive for
management decisions?
5. Has Kevin made repairs, improvements to
property?
Now, how do we value?
• There is no exact formula to do this!
• However, we can place values on services and
increase in wealth/value/etc.
• Once values have been determined, we can
multiply this by the number of years Kevin has
worked on the farm.
The Miller’s: Part Three
• Denny’s dad, Tom, passes away.
• Denny is having back problems and finds it difficult to ride
tractor.
• Kevin’s daughter, Jessica, and her husband want to come
back and farm.
• Half of cash leases have been transferred to Kevin’s name.
• Kevin has assumed the hay operation and all management.
• Denny is slowly phasing out of the business.
• How do we value Kevin’s contribution to the farm?
Factors to Consider:
•
•
•
•
•
•
The value has Kevin added to the farm.
Kevin’s assets that are on Denny’s property.
The physical work does Kevin do on Denny’s land.
Compensation for Kevin manager for Denny and Mary.
Compensation for record keeping.
Wealth preserved because of Kevin’s presence. (i.e. living
in a farm house that would have deteriorated)?
• Personal services performed by Kevin and Grace
Now, how do we value?
• There is no exact formula to do this!
• However, we can place values on services and
increase in wealth/value/etc.
• Once values have been determined, we can
multiply this by the number of years Kevin has
worked.
The Miller’s: Stage Four
• Denny dies; Mary’s health declines rapidly
• Kevin and Grace help her w/ almost everything; i.e.
chores, doctor visits, cooking meals, laundry, etc.
• Cows are gone; Kevin uses buildings, shop, grain bins, etc.
on farm
• Kevin received all Denny’s machinery.
• Mary now owns the entire land because her and Denny
had a joint tenancy.
• How do we value Kevin and Grace’s extra
work on the farm and caring for Mary?
Factors to Consider
• Would the farm business still exist without
Kevin?
• Would Mary be in a nursing home if Grace and
Kevin didn’t care for her?
• Are Kevin and Grace receiving other benefits by
staying on the farm?
• How much value has Kevin added to the farm?
• Is Kevin the managing the entire business?
• Increased profits due to Kevin’s management?
Now, how do we value?
• There is no exact formula to do this!
• However, we can place values on services and
increase in wealth/value/etc.
• Once values have been determined, we can
multiply this by the number of years worked by
Kevin.
Number of Heirs
On Farm Heir's Share from
Distribution page
Value* /hour
Hrs./ Week
Weeks/ Year
Yearly Value
Personal Care
$10.31
5
50 $
2,577.50
Cleaning (Washing dishes, vaccuuming, dusting,
cleaning bathroom)
$ 9.20
3
50 $
1,380.00
Laundry
$ 9.75
3
26 $
760.50
Bathing, dressing, grooming
$10.00
Transportation to Doctor, for Groceries, etc.
$10.20
2
52 $
1,060.80
Pick up and delivery of pills and other supplies
$10.00
0.5
52 $
260.00
$
1,253,562.47
$
-
Other
$
-
Total Personal Care
$
6,038.80
$
-
$
-
$
788,250.77
Assume the On Farm Heir is also the primary caregiver
-
Other
3 Year Care Adjustment
Caregiver/Farmer
Other Heirs
$
$
1,306,685.93
761,689.04
5 Year Care Adjustment
Caregiver/Farmer
Other Heirs
$
$
1,347,413.91
741,325.04
Farm Management
$27.93
5
52 $
7,261.80
Personal Financial Advisor
$36.73
0.5
26 $
477.49
Caregiver/Farmer
Other Heirs
Bookkeeping
$14.37
0.5
26 $
186.81
$
$
Farm Labor
$11.70
5
50 $
2,925.00
Mechanics
$15.11
Lawn Mowing, Snow removal and Groundskeeping
$11.36
$
3
24 $
7 Year Care Adjustment
1,384,954.49
-
817.92
Other
$
-
Other
$
-
Total Farm Maintenance
$ 11,669.02
TOTAL
$ 17,707.82
3
Total Net Worth
$
Cooking
Farm Maintenance
Each off Farm Heir's share
from Distribution page
722,554.75
10 Year Care Adjustment
Caregiver/Farmer
Other Heirs
$
$
1,441,265.36
694,399.32
$ 2,830,064.00
Presented by:
John R. Baker
Attorney at Law
[email protected]
1-800-447-1985