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What Should I Do?
Jesse J. Richardson, Jr.Associate Professor
Urban Affairs and PlanningVirginia Tech
Blacksburg, Virginia [email protected]
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