returning to the farm - university of vermont · farm/ranch income may leave the area ... estate...

Returning to the Farm

David GoellerTransition Specialist

402 472 0661dgoeller@unl.edu

Dept. of Agricultural EconomicsUniversity of Nebraska-Lincoln

Age of Nebraska Farm Operators

Age 1982 1987 1992 1997 1997*Adj.

2002* Adj.

Under 34 13,436 22%

35 – 64

Over 65

Total

Source: Census of Agriculture, NASS

Age of Nebraska Farm Operators

Age 1982 1987 1992 1997 1997*Adj.

2002* Adj.

Under 34 13,436 22%

35 – 64 38,030 63%

Over 65

Total

Source: Census of Agriculture, NASS

Age of Nebraska Farm Operators

Age 1982 1987 1992 1997 1997*Adj.

2002* Adj.

Under 34 13,436 22%

35 – 64 38,030 63%

Over 65 8,777 15%

Total

Source: Census of Agriculture, NASS

Age of Nebraska Farm Operators

Age 1982 1987 1992 1997 1997*Adj.

2002* Adj.

Under 34 13,436 22%

35 – 64 38,030 63%

Over 65 8,777 15%

Total 60,243 100%

Source: Census of Agriculture, NASS

Age of Nebraska Farm Operators

Age 1982 1987 1992 1997 1997*Adj.

2002* Adj.

Under 34 13,436 22%

12,609 21%

35 – 64 38,030 63%

37,056 61%

Over 65 8,777 15%

10,839 18%

Total 60,243 100%

60,502 100%

Source: Census of Agriculture, NASS

Age of Nebraska Farm Operators

Age 1982 1987 1992 1997 1997*Adj.

2002* Adj.

Under 34 13,436 22%

12,609 21%

8,877 17%

35 – 64 38,030 63%

37,056 61%

32,735 62%

Over 65 8,777 15%

10,839 18%

11,31121%

Total 60,243 100%

60,502 100%

52,923 100%

Source: Census of Agriculture, NASS

Age of Nebraska Farm Operators

Age 1982 1987 1992 1997 1997*Adj.

2002* Adj.

Under 34 13,436 22%

12,609 21%

8,877 17%

5,531 11%

35 – 64 38,030 63%

37,056 61%

32,735 62%

33,532 65%

Over 65 8,777 15%

10,839 18%

11,31121%

12,391 24%

Total 60,243 100%

60,502 100%

52,923 100%

51,454 100%

Source: Census of Agriculture, NASS

Age of Nebraska Farm Operators

Age 1982 1987 1992 1997 1997*Adj.

2002* Adj.

Under 34 13,436 22%

12,609 21%

8,877 17%

5,531 11%

35 – 64 38,030 63%

37,056 61%

32,735 62%

33,532 65%

Over 65 8,777 15%

10,839 18%

11,31121%

12,391 24%

Total 60,243 100%

60,502 100%

52,923 100%

51,454 100%

54,539 100%

Source: Census of Agriculture, NASS

Age of Nebraska Farm Operators

Age 1982 1987 1992 1997 1997*Adj.

2002* Adj.

Under 34 13,436 22%

12,609 21%

8,877 17%

5,531 11%

3,7828%

35 – 64 38,030 63%

37,056 61%

32,735 62%

33,532 65%

33,390 68%

Over 65 8,777 15%

10,839 18%

11,31121%

12,391 24%

12,20325%

Total 60,243 100%

60,502 100%

52,923 100%

51,454 100%

54,539 100%

49,375100%

Source: Census of Agriculture, NASS

Nebraska Farm Income & Expense

$0

$100

$200

$300

$400

$500

$600

$700

$800

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Thousands

Year

Gross Cash IncomeCash ExpensesNet Cash Income

Source: Nebraska Farm Business, Inc.

Nebraska Cash Income & Family Living Expense

$0

$20

$40

$60

$80

$100

$120

$140

198419861988199019921994199619982000200220042006

Thousands

Year

Net Cash IncomeFamily Living

Source: Nebraska Farm Business, Inc.

Nebraska Cash Profit Margin

0%5%

10%15%20%25%30%35%40%45%50%

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006YearSource: Nebraska Farm Business, Inc.

Business Life-CycleIntroduction Growth Maturity Decline

Penetrate & Grow

Protect & Defend

New Opportunities Divest

Time

Source: Wadsworth

Business Life-Cycle

Maturity

Time

Source: Wadsworth

Maturity

Time

1st Generation 2nd Generation

Business Life-Cycle

Maturity

TimeSource: Wadsworth

Introduction

Maturity

Estate Planning Research

2/3 of Iowa Farmers plan to never“Fully Retire”

Over 1/2 of all Nebraska farmers do not have a Will

Why don’t we Plan?

Too Complicated

Why don’t we Plan?

Too Complicated

Don’t like to Plan

Why don’t we Plan?

Too Complicated

Don’t like to Plan

Facing our own Mortality

KEY QUESTIONS

KEY QUESTIONSIs there a successor?

KEY QUESTIONSIs there a Successor?

Farm/Ranch Income may leave the area

KEY QUESTIONSIs there a Successor?

Farm/Ranch Income may leave the area

Unintended Consequences:CommunityBusinessesChurchesSchools

KEY QUESTIONSIs there a successor?

Will you pass on your farm assets as a business or a pie?

What to do with the Farm/Ranch?

First question to consider:

Do you want to transfer the ranch/farm as a “viable business” or

simply as a “group of assets”?

A. Transfer PlanB. Estate Plan

FARMBusiness Assets

SuccessionPlan

FinancialViability Goals

RetirementPlan

EstatePlan

EstatePlan

Successful Farm TransitionsGoals

Older GenerationRetirement lifestyle

(money needed)ResidenceNonfarm heirs

Fair vs EqualContributionCompensation

Younger GenerationLifestyle (money needed)Growth of businessAttitude toward debtOwnership vs. rentingFamily time vs. work

Successful Farm TransitionsCommunication

Expectations, Expectations, ExpectationsRegular business meeting throughout

transition periodTalk about it, then write it downShare with non-farm family membersSurprises cause problems

Hired Man or Partner

1990 Networth = $300,000/3 kids = $100,000 2008 Networth= $3,300,000/3kids=$1,100,000Contribution/Compensation 50%/50% Partner and Founder $3,000,000 Partner & Founder $1,500,000 eaPartner’s share $ 100,000 from 1990 $1,500,000 from growth and appreciation $ 500,000 from Founder growth and appreciation $2,100,000 total for Partner $600,000 each for siblings

Successful Farm Transitions:Financial Viability

Farm Efficiency Expenses Purchases (shop around) Bang for the buck Quantity/early pay discounts

Income Production, production,

production Marketing Quality

Successful Farm Transitions:Financial Viability

Farm EfficiencyAssets earning their “keep”Investments paying their interestNew paint disease

Successful Farm Transitions:Financial Viability

Farm Debt StructureLong term vs. short term loansInterest rate Principal payments

Successful Farm Transitions:Financial Viability

Family Living CostRetiring familyFarming familyOff-farm employment

Farm/Ranch Size

Successful Farm TransitionsBusiness Succession Plan

Can you answer yes to these questions?

Are the Parents ready for a partner?How committed is the child to farming?Is the business large enough?Do you have a Common Vision of your

future together?Can you live and work together?Are the non-farming children supportive?

FARMBusiness Assets

SuccessionPlan

FinancialViability Goals

RetirementPlan

EstatePlan

EstatePlan

KEY QUESTIONSIs there a successor?

Will you pass on your farm assets as a business or a pie?

How long will the transfer period be?

Business Succession PlanTRANSFER PERIOD

ownersuccessor

time

Short Transfer Period

Business Succession PlanTRANSFER PERIOD

Long Transfer Period

ownersuccessor

time

KEY QUESTIONSIs there a successor?

Will you pass on your farm assets as a business or a pie?

How long will the transfer period be?

Super Farm vs Spin-off?

Business Succession PlanTWO BASIC CHOICES

Multi-Person Arrangement

Spin-Off Arrangement

MULTI-PERSON APPROACHP C

Business

P & C

Business

P

Business

C

SPIN-OFF APPROACH

Business Business

C

C

C

P

P

Business

P

Business

Business Succession PlanThe Transfer Stages

Testing

Commitment

Established

Withdrawal

Business Succession PlanThe Transfer Process

Ownership

Management

Divide Income

Labor

Business Succession PlanTesting Commitment Established Withdrawal

Labor

Timeline

Management

Timeline

Income

Timeline

Ownership

Timeline

Successful Farm TransitionsIncome/Labor Transition Plan

How will income & labor be split?EnterpriseSharesWageCombination

Timeline for split income and laborJob description

Successful Farm TransitionsManagement Transition Plan

How will management be split?EnterpriseWhole farmFarm activity (marketing)

Timeline for management transitionLearning or testing phaseCompletion date

Parent/child relationship vs. business partner

Successful Farm TransitionsOwnership Transition Plan

Gift Sales Inheritance/willTimeline

Successful Farm TransitionsOwnership Transition Plan

Tax ConsequencesBusiness structureSole proprietorPartnershipCorporationLimited Liability CompanyTrust

Successful Farm TransitionsOwnership Transition Plan

Order of Asset Transfer

Operating Inventory 1

Breeding Livestock 2

Machinery 3

Buildings & Facilities 4

Land 5

Successful Farm TransitionsOwnership Transition Plan

InsuranceLife insuranceDisability insuranceNursing home insurance

Successful Farm TransitionsRetirement Plan

Timeline of farm involvementWhere will money come from?Where will you live?How will you account for non-farm heirs?What will you do?

Successful Farm TransitionsBusiness Succession Plan

Can you answer yes to these questions?

Are the Parents ready for a partner?How committed is the child to farming?Is the business large enough?Do you have a Common Vision of your

future together?Can you live and work together?Are the non-farming children supportive?

Someday Son, This Will All Be Yours

KEYS TO SUCCESS

Strengthen Family RelationshipsImprove Communication SkillsKnow all ExpectationsRecognize Individual DifferencesManagement Participation = LearningDecision MakingEncourage Diversionary Activities

KEYS TO SUCCESS(continued)

Separate Housing is RequiredFit the Agreement to the SituationDevelop a Written AgreementUpdate the Business ArrangementMake it Work Attitude

Time Management Matrix

I. ActivitiesCrisis ManagementDeadline Projects

II. ActivitiesPlanningRelationship Building

III. ActivitiesSome Calls, Mail, Popular Activities

IV. ActivitiesTime WastersBusy Work

Urgent Not Urgent

Not

Im

port

ant

Impo

rtan

t

Resources

Joe M. Hawbaker, Hawbaker Law OfficePhone: 402-558-3540Email: mjbaker@radiks.net

David Goeller, UNL Farm Transition SpecialistPhone: 402-472-0661Email: dgoeller@unl.edu

Nebraska Farm HotlinePhone 800-464-0258

Resources

Don Hofstrand Iowa State University Co-Director, Ag Marketing Resource Center Phone: 641 423 0844

John Baker, Attorney at Law Iowa State University Director of the Iowa Beginning Farmer Center 800 447 1985

Roger A. McEowen, Attorney at Law Iowa State University Associate Professor of Agricultural Law Phone: 515 294 4076