presented by: william e. roberts, clu, chfc auctoris may 14, 2014
DESCRIPTION
Preparing to Become the Next Generation. Presented by: William E. Roberts, CLU, ChFC AUCTORIS May 14, 2014 . Farm and Ranch Statistics. USDA 1999 Agricultural Economics and Land Ownership Survey revealed: Close to 50% of farm and ranch owners were 65 or older - PowerPoint PPT PresentationTRANSCRIPT
Presented by:William E. Roberts, CLU, ChFCAUCTORISMay 14, 2014
Preparing to Become the Next Generation
Farm and Ranch StatisticsUSDA 1999 Agricultural Economics and Land Ownership Survey revealed:
• Close to 50% of farm and ranch owners were 65 or older
USDA 2010 economic survey revealed: • Most farm and ranches are family
owned• 88 percent of all farm assets were
illiquid• 70% of the nation’s farms and ranches
will change hands in the next two decades
• 89% of farmers and ranchers do not have a transition plan
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Recent Family Business Study
Of 500 Family Businesses surveyed: •50% plan ownership transition by
2016•70% have no written transition
plan
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Six Issues in Ag Family Transition Planning
1. Relationship issuesa. Intransigent senior generationb. Siblings conflictc. Siblings spousesd. Multiple marriages resulting in non-blood
line next generation heirse. Mixing business and personal expenses
2. The Numbersa. Three siblings beget eight children
….how to divide 8 ways4
Six Issues in Ag Family Transition Planning
3. Operating siblings in conflict with non-operators
4. The potential of an estate taxa. Creates a liquidity crisisb. Forced sale of illiquid farm or ranch
assets5. Planning documents
a. Don’t existb. Out of datec. Values out of date
6. Heirs not prepared for what they will inherit
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FAMILY BUSINESS
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Research on Wealth Transition
70%
30%
SuccessfulWealth
Transition
WealthTransition
Failure(Regardless of
Assets)60%
Trust andCommunication
25% UnpreparedHeirs
12% Family WealthMission
3%Poor Tax Planning,
Legal Errors Based on two studies of The Williams Group.
Study #1 – Interviews by The Williams Group of 2,500 families who had transferred wealth, were in the process or had done nothing. Research confirmed 70% failure rate and identified causes of the failures, even among families who only owned investable assets.
Study #2 – Research on 750 families conducted by The Williams Group and Michael Morris at the Family Business Institute at the University of Oklahoma. Research supported the 70% failure and the causes of the failures.
Conclusion – Whether a family owns a operating business or is in the business of managing its assets, the failure rate is the same.
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How is Most Transition Planning Created?
• It is often ignored• Focused on Estate Planning• Estate taxes are a primary driver
of planning
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Critical Ingredient for Transition Success
99
Competent Successors
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Without Competent Successors, there is no
Succession Plan• What does the next generation want
to do?–They need to do it well–May need lots of mentoring
• Need to create or develop competent leadership
• Non-family ranch manager11
Ag Family Business Case Study
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Case FactsA. Neuberger Family-Owned RanchB. Location in Eagleford Shale area of
south central TexasC. 1200-1500 head of cattle (amount
varies with drought and feed availability)
D. >50,000 acresE. The ranch owned by the family for
several generations13
Business OperationsA. All assets – land, cattle, and mineral
rights – owned in The Neuberger Family Ranch Corporation, a C-Corporation
B. Neuberger Ranch Corporation is owned equally by the three siblings (G-3) currently living on the ranch
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Family SituationA. Parents are deceased, but left the ranch with
considerable debtB. Bob Neuberger (oldest operating sibling) age 53,
married to Evelyn1. Cal – age 242. Evan – age 223. Ellen – age 20
C. Billy – second oldest – age 51 and married to Lauren
1. Darren – age 202. Sarah – age 18
D. Kevin – youngest brother – age 45, married to Jean
1. Debbie – age 152. Robert – age 12 15
Family AssetsMineral rights:• Oil and gas fracking results in
between $120-150K cash flow per month
• Being used to pay down debt • Debt reduced from over $5M to less
than $1M today• Cash flow could last 15-20 years
16
Family Assets• Total value of the ranch, land, cattle,
equipment and mineral rights cash flow exceeds $35M.
• There is a last man standing mandatory buy-sell agreement in affect for the interests of the 3 siblings but it is perceived to be out of date and buy out is for $5M per sibling.
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What are the challenges?
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Family Conflict Issues
“Relationship issues are the biggest liability a family business faces”.
-Joe Paul, Partner, Aspen Family Business Group
• Family has volatile interpersonal issues• Jealousy over money spent on one
sibling’s house versus another’s• Compensation issues….equal is not
equitable• One sibling is “the boss”• In-laws feelings hurt
19
Family Ownership Issues• Major family value is to retain the
land within the family to honor their parents’ and grandparents’ wishes
• Two of the seven next generation (G-4), Cal & Ellen are interested in operating the ranch into the next generation
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1. The simmering conflict between the families has been keeping them from addressing their ranch succession planning
2. Buy-Sell Agreement is out of date, underfunded, and does not match current objectives
3. All the assets are owned by the operating C-Corporation
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Summary of Challenges
4. Two of the seven G-4’s interested in operating the ranch … likely minority ownership
5. Potential estate tax issues could force a sale
6. Estate plans are out of date and are not taking advantage of opportunities to reduce estate tax at G-3 demise
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Summary of Challenges
23
“Happiness is having a large, loving, caring, close-knit family …in another State”. – George Burns
Succession Strategies Application
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Conflict and confrontation between siblings and their family:
•Family agrees this is a major impediment holding them back
•Family business consultant providing outside input
• Intervention regarding an addiction issue•Real breakthroughs in communication•Had to be addressed simultaneously with the estate and buy-sell planning
•Some of the issues may not be “solved”25
Current Buy-Sell Agreement
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Buy-Sell Agreement
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C-Corp
Stock BasisOwner's B & C keep
their same basis sinceC-Corp buys Owner A's
Shares
Owner A'sEstate
Sale of SharesC-Corp buysshares from
Owner A's Estate
Owner B
Owner C
InsuranceCompany
$5.0M
Death BenefitPaid to C-Corp
as policy owner
$5.0M
Stock
Stock Redemption Issues1. Death Benefit paid to C-Corp may trigger AMT
2. No Increase in Basis to surviving owners
Challenges
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Added Tax Cost (20% rate)
Added ObamaCare Tax Cost (3.8%)
29
Current Corporate Ownership Issues
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Neuberger RanchC-Corp
Current Corporate StructureAll Business Units Under One C-
Corporation
RanchLand & Cattle
Mineral Rights EquipmentHunting
RightsOperation
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Ownership Structure Concerns
– Liability and creditor protection issues
– If the ranch is ever sold, very unfavorable tax treatment accorded a sale of assets owned by the C-Corp
– Makes planning for the passage to the next generation very cumbersome
Challenges
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Next Generation Objectives not in alignment
2 will stay on ranch while the other 5 are likely to leave
– Challenges to family harmony and business success if operating and non-operating children have equal say and vote.
– Differing objectives of operating and non-operating children
– Very difficult to divide the assets of the ranch without huge tax impact
– Could result in family conflict and disharmony in the next generation
Challenges
Solutions?
33
5 Alternative Strategies• Do nothing & stay together• Divide ranch, mineral rights, and debt into
1/3 interests• One sibling buys out the other two and
continues operation• Sell out and divide assets• Stay together
– Attempt to work on differences– Change C-Corp to an S-Corp; Recap from voting to non-
voting stock– Develop a fair compensation plan– Allocate home improvement budget– View mineral cash flow as an “ownership asset”– Work on transition plan to G-4’s interested in operation 34
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Neuberger RanchC-Corporation
C-Corp to S-Corp
Neuberger Ranch S-Corporation10% 90%
Voting Stock Non-Voting Stock
Buy-Sell Design
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Buy-Sell Agreements
1. Purpose of a buy-sell agreement– Create a plan that defines
control, value and dispensation of the stock under defined triggering events
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Buy-Sell Agreements2. Major components of a buy-sell agreement
– Triggering Events• Death • Disability• Termination of participation• Divorce• Sale of the entity
– Valuation for different triggering events– Funding for triggering events
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Estate Tax Issues
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Growth / Tax 7% 2% 45%Neuberger Taxable Lifetime Estate Net to % Wealth
Yr Year Ranch1 Debt1 Estate Exemption Tax Heirs Lost1 2 3 4 5 6 7
$35M / 3 kids 1-2 (3 - 4) * Tax% 3 - 5 5 / 3
1 2013 11,666,667 1,000,000 10,666,667 10,500,000 75,000 10,591,667 0.7%2 2014 12,150,000 666,667 11,483,333 10,710,000 348,000 11,135,333 3.0%3 2015 12,667,167 333,333 12,333,833 10,924,200 634,335 11,699,498 5.1%4 2016 13,220,535 13,220,535 11,142,684 935,033 12,285,502 7.1%5 2017 14,145,972 14,145,972 11,365,538 1,251,196 12,894,777 8.8%6 2018 15,136,191 15,136,191 11,592,848 1,594,504 13,541,687 10.5%7 2019 16,195,724 16,195,724 11,824,705 1,966,958 14,228,766 12.1%8 2020 17,329,425 17,329,425 12,061,200 2,370,701 14,958,723 13.7%9 2021 18,542,484 18,542,484 12,302,424 2,808,027 15,734,457 15.1%
10 2022 19,840,458 19,840,458 12,548,472 3,281,394 16,559,064 16.5%15 2027 27,827,269 27,827,269 13,854,527 6,287,734 21,539,535 22.6%20 2032 39,029,184 39,029,184 15,296,517 10,679,700 28,349,484 27.4%25 2037 54,740,450 54,740,450 16,888,591 17,033,336 37,707,113 31.1%30 2042 76,776,313 76,776,313 18,646,369 26,158,475 50,617,838 34.1%34 2046 100,638,084 100,638,084 20,183,430 36,204,595 64,433,490 36.0%35 2047 107,682,750 107,682,750 20,587,098 39,193,043 68,489,707 36.4%
Wealth Transfer Projection - Bob & Evelyn Neuberger
Bob & EvelynTaxable Estate Wealth Transfer
At Bob & Evelyn's Death
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Transition IssuesHow is the estate tax
funded??
41Taxes Family
Issues to be considered •Should some of the growth be transferred to the next generation now? • How will any interest transferred be held? • Buy-sell agreements to control where those interests go in event of a triggering event 42
Estate Issues
Gifting Considerations
1. If stock is gifted or sold to NexGen, who or what should be the owner?
– Outright ownership• Concern: Spousal rights
– A trust for the benefit of G4
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Gifting Considerations
2. Estate planning considerations for NexGen’s?
– Possible estate taxation– Will stock stay in the
bloodline, be sold back to other NexGen’s or passed to spouse?
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A Plan to Pay the Estate Tax
– Section 6166– Life Insurance– A combination
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Estate Issues
Irrevocable life insurance trust
– Keeps insurance out of the estate
– Provides liquidity when needed
– Can be funded with income producing gifts
– Premium financing46
Estate Issues
“The definition of crazy and impossible is doing the same thing over and over again and expecting different results!”
- Albert Einstein 47
Lessons Learned from Neuberger Case
1. Important to seek outside specialist to deal with relationship issues
a. “Relationship issues are the biggest liability a family business faces”
2. Transition planning requires a team of advisors3. Next generation succession planning is more
complicated due to the number of successors4. Outdated documents can be contentious5. The estate tax liability can complicate the best of
plans6. The next generation is often frustrated by their
parents issues and lack of a plan48
Shirtsleeves to Shirtsleeves?
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Risk PerceptionWhy do 90% Fail? • 60% of failure is due to a lack of
communication and trust within the family around group decision making and governance
• 25% of failure is due to unprepared heirs
• Only 3% of failure is due to failures in financial planning, taxes and investments
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What is Success?
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Healthy
United
Family
High Self EsteemBuilding Trust,
Communication & Team Through “Meaningful Experiences”
Manage & Use
WealthWisely
All Leading to – Healthy Family Group Governance; Able to Manage Entities and Trust
Structures
What is Failure?
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Unhealthy
DividedFamily
Low Self EsteemEntitled
Individuals
Wealth Used
Inefficiently &
WastedAll Leading to – Unhealthy
Divided Governance
Rating your Family’s Preparation
Wealth Transition Checklist53
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William E. Roberts, CLU, ChFC
Co-Founder/Principal5350 S. Roslyn Street, Suite 310Greenwood Village, CO 80111
Office: 303.740.8001Fax: 303.220.9545