2014 succession planning business structures


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Agriculture business succession planning

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2014 succession planning business structures

  1. 1. BUSINESS STRUCTURES AND TAXES Legal and Tax Considerations January 24, 2014
  2. 2. What are your goals?  Ease of operation  Transferability  Tax benefits  Liability protection  Self-Employment tax  Fringe Benefits  Flexibility  Real Estate Basis
  3. 3. Other Considerations  Life/stage of business  Sources of capital  Inter/intra family issues  Taxes  Risk management  Preparing for next generation  Estate planning implications  Management or control  Termination of business  Multiple entities  Key Employees
  4. 4. Using Entities in Farm Planning  Business Purpose Liability Protection Organize Operation(s) Greater Flexibility Better profitability analysis  Estate Planning Purpose Protect Farm Assets from family or creditors Greater flexibility in planning Easier transfer of assets
  5. 5. Types of Entities  C Corporation  S Corporation  Limited Liability Company  Partnership/Family Limited Partnership Other Entity types Sole Proprietor (Schedule F) Trust (Revocable – Irrevocable)
  6. 6. Typical Scenario – Preferred Choice  Limited Liability Company or S Corporation Flexibility, Tax benefits, taxed at owner rate  Multiple Entities – greater flexibility Equipment and labor pool Land Livestock
  7. 7. When To Choose Other Entity Types  C Corporation Need for control at the top Shareholders who would have trouble with pass-through income Special needs shareholders, “stranger” shareholders Limits movements of assets and cash WATCH – Dividends are double-taxed.
  8. 8. When To Choose Other Entity Types  Partnership Well-suited for short-term project Can be adapted or evolved into LLC Can be terminated at end of project Highest liability issues and joint-partner risk
  9. 9. When To Choose Other Entity Types  Sole Proprietor Greatest liability risk – both business and personal assets at stake
  10. 10. LLC versus S Corp  Tax free in-and-out (mostly)  Easy to change as circumstances change  Can have many layers  Prevents de- capitalization of Corp by young owners  Stronger mgmt control in officers Limited Liability Company S Corporation Structure
  11. 11. LLC versus S Corp  GENERAL Members pay SE Tax  LIMITED Members are exempt from SE Tax  SOMEONE has to pay SE Tax  Can be exempt from SE Tax if salaries are paid to SH Limited Liability Company S Corporation SE Taxes
  12. 12. LLC and Trusts Land  LLCs – “easy-in, easy-out” flexibility  Basis locked at formation  Can change structure at any time  Can organize as Business  Locked in for duration of Trust  Basis locked at formation  Cannot change structure  More difficult to operate as “business LLCs and Land Ownership Trusts and Land Ownership
  13. 13. LLCs and Tax Form  Pass-through income, depreciation, etc.  Humans usually lower tax rate than corps  No pass-through tax  Corps taxed at higher level than humans Partnership LLC Corporation LLC
  14. 14. Entity Structure and Risk Management  Liability Insurance – adapted for every entity type, but does not make you “risk-proof” Entity structure can either “keep in” or “keep out” risk You cannot insure against your own bad behavior Does not protect against financial liability (bad debt, bad business decisions, over- extended credit)
  15. 15. Entity Structure and Risk Management  Liability for outside events limited to assets in LLC – cannot get at your personal assets  Can protect real estate from operational liability  High-risk elements (equipment, labor) in one LLC  Liability limited to assets in one LLC (not entire operation) Keep Risk Out Keep Risk In
  16. 16. Insurance  Basic liability insurance  Basic casualty insurance  Crop insurance  Vehicle insurance  Workers Comp  Umbrella/Operations insurance  Life insurance
  17. 17. Entity Choice and FSA/Farm Program  No more “3-entity Rule”  Now – payment limit falls to individual owners  Critical factor is “active participation” by owners  Careful structure of “cash rent” entities  Watch issues of Seniors and Minors
  18. 18. Death and Taxes  Indiana Inheritance Tax – repealed  Federal Estate Tax  $5.25M per person (adjusted for Inflation)  Portable between spouses  Unified Gift/Estate/Generation Skipping Rate  Capital Gain Taxes
  19. 19. “Stuck” Structures What do you do when you can’t get out?  Built-in Capital Gains  Low basis – High value real estate  Cash in the entity – not in your pocket  Planning ahead – looking out 10+ years  Restructure business operations away from “stuck” entity
  20. 20. Odd and Unusual Factors  Conservation easements  Shared well (water or gas)  Water, Mineral, Gas rights to 3rd parties  Hunting Rights  Cell Towers – long term leases  Wind Towers – long term leases  General easements and other Deed restrictions
  21. 21. Fair – vs – Equal  Planning should consider the needs of both “farm” and “Non-farm” heirs Whether “farm” heir should have preference for land over cash or inventory inheritance Whether all heirs can cooperate for operating an entity
  22. 22. Fair – vs – Equal  Planning should consider the needs of both “farm” and “Non-farm” heirs  Whether “Non-farm” heirs can incorporate farm income into their personal financial picture  Use of “non-farm” planning tools to equalize an estate and leave more “farm” assets to “farm” heirs  Life Insurance, Cash investments  Special Needs – Special Heirs  Physical/mental infirmity – qualification for Gov’t entitlements  Legal issue
  23. 23. Plan for Transition – Gen 1 QUESTIONS What will be the most effective and fair way to pass the farm business to the next generation? When should the change take place? OPTIONS Buy out Rent out Other Family Gift Bequest TIMING OF TRANSITION During Life After Death of Spouse 1 After Death of Spouse 2
  24. 24. Goodacre Farms LLC A&B Goodacre Farm Management LLC Goodacre Hogs LLC Bill & Ann Goodacre Mary – Tom – Jane Case Study
  25. 25. Assets  1,400 acres owned ground  1,400 acres rented ground  $2M machinery, buildings, bins  $500,000 Savings  $500,000 Retirement Farm Assets Personal Assets Value of Estate (March 2013)  RE = $ 9.8M  Farm EQP = $ 2.0M  Cash assets = $ 1.0M
  26. 26. Organizational Structure GoodacreFarms,LLC • Farm Real Estate • Cash or Share Rent A&BGoodacreFarm • Machinery • Labor • Contract Farming • Key Employee GoodacreHogsLLC • Livestock contracts • Animal buildings
  27. 27. EntityRelationships Real Estate LLC • Contract with MGMT LLC • Liability insulation • Estate Plan – Ownership to all children Management LLC • Contract Farming • Production “stake” for sweat equity (Son & Key Employee • Liability insulation Livestock LLC • Production stake • Liability insulation from Real Estate Cross Contracts
  28. 28. FamilyRelationships Real Estate LLC • Starting out - Owned by Parents • Gifted to/inherited by children • Rental income to owners • Downside – Basis lock! Management LLC • Starting out - Owned by Parents • Sweat Equity and gradual “buy in” by farming child Livestock LLC • Opportunity for start-up by Gen 2 (Son) • Can be co-ownership by parents/son
  29. 29. Considerations  Income tax effect of LLC on off-farm owners  K-1 and personal tax rate  Unwelcome complications to Gen 2 taxes  Issue of locked-in basis for real estate  Yes, but is that important? Will there be liquidation?  Estate Tax  Planning for entity discount  Minimizing estate taxes in high value real estate market
  30. 30. Factors in Farm Planning Entity structure Risk Mgmt Fair v Equal Transition Taxes Business Operations
  31. 31. Farm Entity Structure  Flexibility is KEY  Goals suggest structure  Estate Planning – Will there be an Estate Tax Risk?  Transition to Gen 2  Consideration of on-farm and off-farm children  Needs of Gen 1, Gen 2 and Gen 3  Liability protection/insulation of assets
  32. 32. Questions? Contact information: Derek Fisher, Fisher & Associates Email: derekf@fisheraccounting.net Miriam Robeson, Attorney at Law Email: miriamrobeson@lawlatte.com Website: lawlatte.com Business Structures and Taxes