As advisors, we are actively involved in succession planning for farmers and other businesses.  This is usually a long process and will change over time and as the generations involved grow and mature, their goals will usually change.

There are three main goals related to this planning:

1. Protect – The primary goal of any succession plan is that both generations involved are still protected in the following areas:

                Financial – Are the owners transferring the business still protected from a financial standpoint.  Did they create enough retirement and other assets outside of the farm to protect their retirement income

                Operational – Does the succession plan provide protection from operational issues such as the new generation being ready to take over the farm operation.  Nothing will ruin a farm family quicker than the next generation taking over sooner than ready.

                Entity – Does the succession plan provide for legal and entity protection.  Are they taking advantage of limited liability companies, corporations and trusts where appropriate.

   2.  Provide – Once protection is taken care of, the next step is to provide for both generations.  Is there enough cash flow to provide a normal living standard for both the current generation and the new generation.  If not, how will the farm family address this.  Will they have a spouse work off the farm or one of the heirs.  Will they do custom farming, etc.

  3.  Prosper – After the farm family is protected and provided for, then comes the time to prosper.  Does the farm family have enough management time and experience to expand the farm operation with more acres.  Or do they have excess machine time and people to do custom farming.  Each farm family has different goals when it comes to the prosper stage, but they must always remember to protect and provide first.

What stage is your farm operation in?

For an online video presentation of my “chalk talk” on this subject on the AgDay special “The Legacy Project” go to this link.  Here you will see a farm family discussing their succession plan with Kevin Spafford, host of The Legacy Project” and myself giving him advice.  Later in the show, Kevin and I have a chalk talk on the three P.

I hope you enjoy watching it and let me know of any future discussion topics that you would like to see addressed.

Most farmers are assuming that since there is no estate tax for 2010, that this must be a good thing for all taxpayers.  The reality is that many farmers may end up paying more in taxes than under the law in effect for 2009.  This is due to the fact that carryover basis will no longer be in effect for many estates.

Under the old law, when a person died, all of their assets were revalued for income tax purposes  based upon the value at the time of death.  Then when the heirs sold the assets, this was the “cost” that they could use in determining their gain or loss.

For example, suppose, a farmer died owning equipment that was worth $1 million dollars that had been fully written off.  Under the old law, you could step up the value to $1 million dollars and depreciate it over 5 to 7 years.  If instead, you decided to sell the farm equipment for $1 million immediately, there would be no tax owed.

Now, when you inherit the equipment, you get no step up in basis, and when you elect to sell the equipment, the gain will be completely taxable.  Also, this sale will not qualify for capital gains treatment, therefore it will be subject to ordinary income tax rates.  At a 35% bracket, this would result in owing $350,000 of tax.

Therefore, due to not having an estate tax, we went from (1)  complete step up in value to date of death value, (2) no estate tax being owed for all estates under $3,5 million, and (3) full write of assets over time as depreciation against other income  to owing $350,000 in income taxes.  This does not sound too good to me. 

I am hoping that Congress gets their act together and fixes this, but I am not too hopeful.  I will keep you updated.

As a CPA, I have been involved in many family meetings.  Sometimes, I act as an advisor to the participants.  At other times, I may actually be part of the family that is having the meeting.

I remember having a client several years ago that had several children that were actively involved in the business during their lifetime.  We hada family meeting with several advisors and it became apparent very quickly that strains of the family dynamic and how it affected their relationships.  Very quickly, the perceived problems of childhood, parenthood and other factors came out and you almost had a civil war on your hands.  We were able to get it back on track, but it was touch and go for a while.

Dr. Donald Jonovic writes a monthly column in Successful Farming that I think is always worth reading.  A recent column from the print version of the magazine dealt with  Family Rules of Conduct for these meetings.  Dr. Jonovic listed several rules for effective meetings.  Some of the ones that I feel are especially relevant are:

• Always treat each other the way you would treat important friends or colleagues.  – Too many times I find that family will treat each other worse than any other friend or acquaintance.  We should really treat our family better than our friends.  If we do, many of our family problems would be cured.
• Keep your business and personal disagreements confidential and within the family. – Disagreements should be handled in-house.  Don’t put them in the “outhouse” so to speak. 
• Keep meetings fun – Farming is fun and having meetings about farming and family should be fun.  Have some type of family interactive game or other ice breaker to keep things loose.
• Do not equate difference of opinion with disloyalty – Remember that having people always agree with you means they go over the cliff with you when things go wrong.  Encourage people to give you a different viewpoint.  This is always the best way to learn.
• Leave your cell phones at the door – This may be tougher for our Gen X and Gen Y family members, but it is only for an hour.  They can survive and will learn to enjoy it.

There are many other good points, but to make your meetings effective, implement as many as you can.

One of the shows that I have taped on my DVR each day is AgDay.  It comes on in the morning at 6 am and when I get home from work, that is usually the first thing that I watch on TV.  The parent of AgDay, Farm Journal Media has launched a new monthly TV show in conjunction with Pioneer Seeds called Legacy by Design.  It is hosted by my friend Kevin Spafford and the first inaugural show is on AgDay today. 

I look forward to watching the show and see how it evolves over time.  The Legacy by Design site is dedicated to helping farmers transition their farm operation from the current generation to the next or the ones after that.  As our farmers are aging, many of the children that used to hang around and farm are no longer doing that.  It is nice to see the ones that are.

Keep up the good work Kevin and staff and let’s see how the show grows.

The ROTH IRA has been around for many years.  For many farmers and others that have income over $100,000 annually, they have either been unable to contribute to a ROTH IRA or convert a regular IRA to a ROTH IRA.

Starting in 2010, these rules are changing for ROTH IRA’s.  Here are 6 things that you should know about 2010 ROTH IRA conversions:

1.  It is for adjusted gross incomes over $100,000 – Whether you are filing as an individual or married filing joint, the adjusted gross income limitation of $100,000 will become nonexistent for the Roth IRA conversions of 2010.  For higher income earners, this is a prime opportunity to convert money into the Roth IRA to allow your money to grow tax-free for retirement or to pass onto your heirs.

2.  You don’t have to wait until 2010 – For people who earn less than $100,000 they can do the conversion this year.  With the market being down, this may be a great time to convert (in hind site, doing it in March would have been the best time).  If you convert too soon, you can always reconvert back to a regular IRA by October 15 of the year you convert.

3.  2010 is the year, but not the year the tax is due – While 2010 is the actual year that you will be able to convert, the income to be claimed can be deferred until 2011 and 2012.  Their is a special provision for 2010 allowing you to report 50% of the conversion in 2011 and 50% in 2012.   This normally a great thing to do, but if income tax rates increase substantially in 2011 versus 2010, you may want to elect to pay in full next year.  This special conversion option is only available for conversions in 2010.  After that date, you will owe the tax on the conversion in the year after conversion.

4.  You can save taxes now – Knowing that the event is coming up soon, you should start saving for paying the taxes now.  Add some money to your emergency fund to handle the extra taxes due in 2011 and 2012.

5.  Convert but can’t contribute – Just because the conversion income limit of $100,000 has been eliminated, this doesn’t mean that the income restrictions for a normal ROTH contribution have been changed.  If you are over the phase out limits of the ROTH IRA, you will not be able to contribute new money to a ROTH.  You may be able to contribute to a non-deductible IRA and then convert to a ROTH in 2010.

6.  Convert traditional IRAs and old 401ks  -  The 2010 conversion is not limited to just your traditional IRA.  If you have old 401k, profit sharing or other types of pension money, you can also convert these to a ROTH.

As with any retirement and tax planning, make sure to review this with your income tax advisor and financial planner to make sure you make the right election.  Make your plans for 2010 now.

I have been reading several articles lately on the possible estate tax law changes that will be coming.  The Bush changes from about 8 years ago will be changed and soon.

Most agree that the estate exemption will most likely be around $3.5 to $5 million and indexed for inflation.  Also, the gift tax exemption will also go back to being the same as the estate tax exemption.  There are also signs that they will allow any unused exemption for the spouse who died to be carried over to the surving spouse.

For example, under the current law, if one spouse dies first and has nothing in their name, their estate tax exemption expires worthless.  Under the proposed changes, if a spouse dies with assets of $2,000,000 and the estate exemption is $3.5 million, then $1.5 million would carry over to the surviving spouse.

A great change for farmers is an increase in the special use allowance up to about $3,5 million.  This allows many more family farms to pass tax free to their heirs and keep it in farming.  The special use valuation is a method that reduces the value of farm property to what it would be worth as farm use only.  Many farmers are close to cities and their land is worth substantially more as development property than farm property.  This special use allows the estate to value it as farmland only.  There are many restrictions on this, but for those who it applies to, it can save substantial taxes and keep the land in the family as farmland.

As these changes wind their way through Congress, I will keep you updated.

Kiplinger magazine has an article on a great way to borrow money from the government on an interest-free basis and, then pay it back and start getting extra benefits.  This method applies to all people who apply for social security.  It allows them to start their benefits at age 62, collect and invest the money until age 70.  If they do not need the money to live on, they can invest the monthly payments, collect interest and then simply pay the principal back.  Once they pay the principal back, they can then start receiving a much larger monthly benefit

For example, assume someone starts social security at age 62, receiving $750 per month.  From 62 to 70, they would receive a total of $72,000.  If they invest this at 8%, they would have a total of $101,000 at age 70.   To complete the do-over, they would repay $72,000, have a profit of $29,000 and start receiving a  new monthly benefit of $1,320.  If they live to age 85, they would get total benefits of about $237,600 with the do-over versus about $135,000 without.

The amount that they pay back also qualifies for an income tax deduction.  This provision has been around since at least the 1940’s, however, with the Baby Boomers starting to retire, this will become much more prevalent.

If you have started social security or are approaching retirement age, please review this option with your financial advisor.  Read the rest of this entry »