What Should I Do?

Jesse J. Richardson, Jr.Associate Professor

Urban Affairs and PlanningVirginia Tech

Blacksburg, Virginia 24061-0113jessej@vt.edu

Farm Business Succession and Estate Planning Pre-conference Session

National Risk Management Education ConferenceApril 16, 2006

Phoenix, Arizona

Too Many Choices!

• Limited Liability Company or Corporation?• Living trust?• Gifting or leave at death?

Estate Taxes Should not Drive the Plan!

• Estate taxes have never been the issue• 2.2% of estates pay estate taxes• 5% of that 2% have farm assets (.11% of estates)

“What’s the goal?” should precede “What’s the solution?”

• The answer to all of the questions is “IT DEPENDS”!• Depends on:

– values– goals– family dynamics– more

• None of these tools are magic!• Don’t put the cart before the horse!

Working with the Attorney and other Professionals

• If you convey your goals to the attorney, CPA or other professional, they can review the appropriate tools to achieve the goal

• The legal and tax aspects are the easy part• The family dynamics and COMMUNICATION are the

hard part• There is no crying in law school

Beware the Boilerplate!

• Most attorneys are like mechanics• If you do not ask otherwise, you will get a boilerplate• Boilerplates are not tailored for your family!• Demand the tailored approach!

Substance over Form

• Business organization is not as important as business agreements

• Buy-Sell• Restrictions on transfers• Termination• Protection from divorce• Disability

5 D’s of Business Agreements

• Death• Disability• Disagreements• Divorce• Disaster

Buy Out Provisions

• Set out formula for determining buy/sell price—use book value or other easily determinable number; keeps price down but must be evenly applied—no exceptions

• Set terms of buyout—installment purchase over a number of years, reasonable interest rate

• Use of life insurance to fund buyout of deceased owner’s interest from surviving spouse/children?

Protection from Divorce

• Limitations on transfer and ownership of business interests; for example, only direct lineal descendants of Grandma or Grandpa can be owners (what about adopted kids?)- keeps the outlaws OUT!

• Consider possibility of divorce when crafting buyout provisions

• Installment sales provisions

Alternative Restriction on Transfer

No transfer to anyone other than a direct lineal descendent of Jesse J. Richardson, Jr. shall be valid unless a 2/3 majority of the owners of the business vote to admit the new owner to the business.

Separate ownership and control?

• Gift ownership units to off-farm and on-farm heirs

• Gift participating units only to the on-farm heir

• On-farm heir holds all of the votes, thus control

• If on-farm heir decides to sell land, off-farm heirs share the proceeds

Conclusions

• Anticipate the unexpected• Plan for the worst-case scenario• Cover all your bases• Tailor the business documents to the family• COMMUNICATE• PLAN