Saving the Small Family Farm


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Talk by Peter Callan at the 2011 Small Farm Family Conference

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  • Talk about separate vs. equal how do you treat non farm heirs in estate planning – savings, stock, cash life insurance?If you decided to use life insurance as a way to compensate non farm heirs in transferring the farm. Do you have enough to pay off debt?When talk about life insurance – do you have enough to cover payment of debt owed and at least 1 -2 years of funds to hire someone to continue to operate the farm so farm will not have to be sold at fire sale prices
  • Tell story of Ray buying a Cadillac car as way to start the discussion on the need for two people to communicate
  • Tell story about Bob Smith being brought in to work with 86 year old lady who would not develop an estate plan to transfer property on 350 cow dairy farm to son who was 65 years old. This was a big farm in the early 1970’s. Farm had 0 debt which was incredible.Local extension agents could not get mother to develop and estate plan and transfer assets to the son. Mother remembered Bob Smith when he worked as a young extension agent in that county. Now Bob Smith was 65 and had taught at Cornell for a number of years and was considered a national expert in farm transition planning. All property was still in the mother’s name. Son took over the farm at 17 when the father died early. Father was a marginal manager but the son was a good manager who built the farm up. Bob told grand sons age 38 and 40 to go look for a job after they finished milking the next day because they did not own anything except their cars and why should they waste their life working on the farm like their dad and have nothing to show for it.Mother agreed to transfer real estate and assets to son and grand sons said “you young people want to talk everything away from us old people.”Talk about older generation telling younger generation that they could go ahead and make these changes on the farm but they might lose the farm. Older generation had seen the young make changes on other farms in the past and the farm went bankrupt. You can go ahead and make these changes but I hope that I will not be around to see the family farm that has been in the family for X years (long time) be sold off. Personality stylesRattlebrain – flighty, unstable, constantly changing mind, indecisive in their young years they were constantly changing jobs or majors in college since it took time to find themselves.Knot head or meat head – narrow minded, think that they know it all, will not listen to others who may have good ideas and or advice, will never change their ideas or the way of doing things
  • Tell story of Ray buying a Cadillac car as way to start the discussion on the need for two people to communicateSome families have each family member bring a resume or short synopsis of what is currently going on in that person’s and/or families lives – what is important in their lives***Do this because family members may have moved away at age 18 and now live in another part of country. Family members remember each other the way they were as children and not as adults Talk about Billy K can not manage a farm – buildings falling down –eve troughs coming off the house, not smart enough to replace furnace in old house to generate rental income, house needs to be cleaned with a fire hose that has disinfectant in it. This has taken place in 6 years since Aunt Cele died. Farmstead looks like a junk hole
  • Dicuss farm vs. e
  • Expense ratio today in the 80-84% range. PLC as a lender saw if expense ratio greater than 80% difficult to pay for FLE, service debt and replace capital items.For value added .65 expenses ratio ~$200,000 of income Farmers market is not the solution to generating higher farm income.Still have volume of crops to sell to pay the bills. How many pounds of tomatoes, squash, ears of corn we need to sell to generate 200K
  • On many farms when farm is sold to the younger generation. The younger generation still pays heat, electric bill to older generationLeasing do not generate enough money to pay FLETax consequences capital gain when they sell the farm.Bottom line what will they live on?
  • Talk about farmers have many times sacrificed to keep the farm operating and lived a substandard level of living. Shouldn’t they live like to rest of the people.As lender PLC gave copy of budget to borrowers to calculate FLE – much higher than expected PLC saw many FLE 35-40K without putting in value for housing, utilities, gasoline from the farm gas tank.
  • Emphasize how long will 600K last with various rates of return.Real rate of return is calculated after inflation.With today's interest rates (savings account) less than 1% actually going backwards with inflation since inflation first 5 month ~2.3% last 10 years ~2.5 %Some investment advisors project single digit returns for the next 10 years on the average before inflationSome investment advisor call last ten years the lost decade since portfolios did not increase in value look at major indices Dow and S&P 500 actually lost money at the end of the 10 year period by 1-3 % W/O taking into consideration inflation
  • Death, divorce, disabilityAll farms will be sold at some time we do not live forever. What is your plan?Who makes the decision to exit – producer or the doctorPLC purchased cattle at cheap prices in 1989 – young farmer told to sell cows ASAP because he had major health problems.Do you have cash to cover hiring someone to operate the farm if the farm owner dies or becomes disable. Maybe this happen 1 out of a large number. Do you want to be that one person. Contingency plan – Mark told Veronica to sell cows if he dies since Steve could not manage dairy herd must be told to do everything, sell crops in the field and then decide what she will do/
  • Saving the Small Family Farm

    1. 1. Saving the Small Family Farm and Saving the Small Farm Family Original Slide Presentation Developed by Dr. Alex White, Agricultural & Applied Economics , Revised & Presented byPeter Callan, Farm Business Management Extension Agent "Managing the Farm Transition" Workshop 1
    2. 2. Transitioning the Farm To The Next Generation Is a Stop & Go Process that is Convoluted & often Walks the same ground many timesbefore a Successful End Point is Achieved! 2
    3. 3. Farm Transition Planning Crucial to survival of the farm! Involves many topics  Goals  Living arrangements & income needs  Analysis of the resources & environment  Estate planning  Tax management  Contingency plans (“What ifs”) Most important factor is Communication!! 3
    4. 4. Getting Started Must assess:  Family members’ goals  Older/younger generation, spouses, heirs, etc.  Personal goals and business goals  Family members’ abilities  Operating environment  Economic viability of the farm Sounds like a business plan to me! 4
    5. 5. $1 Million Question for You You have $1 million in cash  Would you make plans to use it?  Would you discuss your plans with family?  Would you investigate your investment options?  Would you get outside help?  Would you include it in your will?  When would you do these things? Ave. VA farm has more than $1 million in assets  Would you answer these questions the same way for your farm assets? 5
    6. 6. Possible Transition Options Continue to farm as a full-time operation  Older generation is active partner  Ben Cartwright School of Farm Management  Older generation phases out of management  Older generation gets out completely Operate farm as a part-time operation  Both generations involved vs. one generation Lease the farm Sell the farm Sell the farm and purchase a farm in another 6 area
    7. 7. Goals Business goals  Keep the farm in the family, (ownership)  Keep the family on the farm, (operating that farm)  Keep the family in farming, or (operating a farm)  Keep the family from farming - Huh! Older generation’s business goals Younger generation’s business goals Personal & family goals  Of all involved! 7
    8. 8. Possible Business Goals - Topics More/less risk More/less debt Expansion/contraction of operation Increased/decreased labor effort Increased/decreased management responsibilities No/dramatic change in operation  New enterprises, markets, etc. Time away from the operation 8
    9. 9. More on Goals  Family living needs  US ave. of 2008 US average pretax/household income ~$63,500 (BLS)  Averages family living expenses ~$50,500 (BLS)  Do you expect any retirement income??  “Non-farm” children  Must clearly establish goals  Involve all relevant parties  Compromise  Communication is critical!! 9
    10. 10. Goals Keep your main goals VISIBLE Mind reading not allowed! Communicate your goals! Revise your goals as necessary 10
    11. 11. Communication It takes TWO to communicate Listening is critical Honesty and trust are critical Too often taken for granted by both parties Not always easy You CAN NOT communicate  Body language, expressions, actions Environment is important 11
    12. 12. Barriers to Communication Privacy issues  “family secrets” Lack of mutual respect for each family member’s goals, age and experience Personality profiles  Chip off the “old block” Using guilt to “control” family members 12
    13. 13. Is your family ready for the bigconversation? Taking stock of family unity and shared values  What are your familys shared values and traditions?  How have previous generation used family resources to perpetuate the shared values?  How will existing family resources be used to perpetuate the shared values for future generations? 13
    14. 14. Steps a family can take to preparefor open discussion about finances Each family member writes down answers to the following questions before the meeting:  Family members’ goals  Older/younger generation, spouses, heirs, etc.  Personal goals and business goals  Family members’ abilities  Can the younger generation manage money? 14
    15. 15. Steps a family can take to prepare foropen discussion about finances cont. Net Worth Statement for older Generation Income requirements for older generation What are the older generation’s goals in the distribution of assets? 15
    16. 16. Steps a family can take to prepare foropen discussion about finances cont. Who inherits real estate and financial assets? Who inherits personal property?  Furniture, dishes, silverware etc.  Family heirlooms Who speaks to whom in your family? 16
    17. 17. Holding a Family Meeting Who leads the discussion? Ben Cartwright rules of order “Golden” rules of family communication How to get people to speak? Rules of civility Respect for each family member’s comments 17
    18. 18. Holding a Family Meeting cont. Avoid family secrets Discussion of fair vs. equal Third parties can help or harm the discussion 18
    19. 19. Fostering Good Communication Have regular family meetings  Discuss major issues candidly  Leave your egos outside  Meet AWAY from the farm/house  Keep minutes of the meeting Respect for each family member’s ideas Consciously work on listening Be open-minded Don’t gloss over or ignore problems – be open 19
    20. 20. Agreement on shared values forfuture generations Makes estate planning and tax management issues easier to address Promotes family unity Perpetuates family values and traditions 20
    21. 21. Living Arrangements & Needs Where will you live?  Before, during, after transition  On farm, off farm How much money will you need to live?  US average = 2008 US average pretax/household ~$63,500(BLS)  That equates to ~$400,000 of gross farm income (84% Expense/Receipt Ratio)  Need to develop a budget for family living expenses 21
    22. 22. Sources of Income – Older Generation Net farm income  Continued draw from farm Lease of farm assets Sale of farm assets (after-tax) Off-farm salary/wages Retirement income  Pension, Social Security benefits Personal savings & investments  IRAs, 401(k), taxable inv., real estate, etc. 22
    23. 23. Can You Afford to Retire? Retirement living needs  60-80% of pre-retirement needs – this is not realistic  100-125% Some expenses hidden under the farm Increased medical expenses Travel, leisure, spoiling grandkids, etc.!! Retirement planning worksheet How long will your retirement funds last? 23
    24. 24. How Long Will $600,000 Last? Annual Living Expense Needed from Savings $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 1% 22.2 16.2 12.7 10.5 8.9 7.8Real Rate 3% 29.6 19.4 14.5 11.6 9.7 8.3of Return 5% 62.4 25.7 17.4 13.3 10.8 9.1 7% Forever Forever 22.7 15.7 12.2 10.0 9% Forever Forever Forever 20.3 14.3 11.2 Cell values indicate the number of years your portfolio will last. Consider impact of inflation! 24
    25. 25. How Much Must I Have in the “Bank” If I Spend $50,000 per Year? Retirement Portfolio $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 1% 4.1 8.3 12.7 17.3 22.2 27.3 Real Rate 3% 4.2 9.0 14.5 21.2 29.6 40.6 of Return 5% 4.3 9.8 17.4 29.4 62.4 Forever 7% 4.5 11.0 22.7 Forever Forever Forever 9% 4.7 12.5 Forever Forever Forever Forever Cell values indicate the number of years your portfolio will last. 25Ignores any other sources of income
    26. 26. Resources: Abilities Carefully analyze each operator’s abilities  Production, finance, marketing, labor mgt.  “Business” management  Organization, scheduling, creativity, innovation  Listening, thinking, decision making  Work ethic, trustworthy, honesty  Personality profile 26
    27. 27. Operating Environment  Water, soils, land, & labor availability  Adequate supply, adequate quality  On-farm facilities  Condition, capacity  Infrastructure  Supplies, financing, transportation, processing , stable markets  Regulations, zoning, urban pressure 27
    28. 28. Economic Viability  Depends on:  Production capabilities  Financial condition  Marketing plan  Operating environment 28
    29. 29. Cash flow, profitability, debt mgt.are keys successful farm transition Can the business generate sufficient revenues to pay:  Farm expenses  Family living expenses  Make debt payments  Replace worn out capital items  Equipment  Buildings 29
    30. 30. Is the Farm Worth Transferring? If “No”, plan accordingly  Older Generation  Sell or not? (Financial planner)  Estate planning (Attorney)  Source of income for living needs?  Younger Generation  Career plans?  Source of income?  Discuss with all relevant parties  Spouse, children, partners, non-farm kids 30
    31. 31. Is the Farm Worth Transferring? If “Yes”, plan accordingly  Communicate early and often  Clearly lay out managerial responsibilities  Develop a transition “timeframe”  Ownership and management responsibilities  Communicate regularly!!  Estate planning (Attorney)  How to treat non-farm kids!!  Put the plans in writing – business plan  Communicate, communicate, communicate! 31
    32. 32. Contingency Planning Always have an escape route Think about how to get out BEFORE getting in! Be creative, flexible, open-minded Look at opportunities vs problems Write down your contingency plans 32
    33. 33. Consequences of NOT developing and implementing a transition plan IRS has a plan for you!  Legislation mandates how property is transferred between generations Estate transfer laws may not implement the older generation’s wishes for the transfer of land and family assets Strained relationships between family members 33
    34. 34. Questions? 34