Saving the Small Family Farm

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

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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!

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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!!

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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!

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$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

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

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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!

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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

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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!!

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Goals

Keep your main goals VISIBLE Mind reading not allowed! Communicate your goals! Revise your goals as necessary

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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

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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

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Is your family ready for the big conversation? Taking stock of family unity and shared

values What are your family's 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?

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Steps a family can take to prepare for 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?

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Steps a family can take to prepare for open 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?

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Steps a family can take to prepare for open 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?

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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

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Holding a Family Meeting cont.

Avoid family secrets Discussion of fair vs. equal Third parties can help or harm the discussion

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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

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Agreement on shared values for future generations Makes estate planning and tax management

issues easier to address Promotes family unity Perpetuates family values and traditions

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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

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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.

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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?

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How Long Will $600,000 Last?

$30,000 $40,000 $50,000 $60,000 $70,000 $80,0001% 22.2 16.2 12.7 10.5 8.9 7.8

Real Rate 3% 29.6 19.4 14.5 11.6 9.7 8.3

of Return 5% 62.4 25.7 17.4 13.3 10.8 9.17% Forever Forever 22.7 15.7 12.2 10.09% Forever Forever Forever 20.3 14.3 11.2

Annual Living Expense Needed from Savings

Cell values indicate the number of years your portfolio will last.

Consider impact of inflation!

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How Much Must I Have in the “Bank” If I Spend $50,000 per Year?

$200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,0001% 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 Forever7% 4.5 11.0 22.7 Forever Forever Forever9% 4.7 12.5 Forever Forever Forever Forever

Retirement Portfolio

Ignores any other sources of income

Cell values indicate the number of years your portfolio will last.

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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

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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

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Economic Viability

Depends on: Production capabilities Financial condition Marketing plan Operating environment

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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

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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

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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!

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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

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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

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Questions?

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