Woodbury-Farm Family Business 10/13 14:29
Make-or-Break Decisions: Gift or Sell?
Consider both tax and emotional consequences when transferring family
By Lance Woodbury
DTN Farm Business Adviser
Over the course of my experience in consulting with family owned farms and
ranches, there are a few critical decisions which, if approached and executed
well, contribute to the longevity of the enterprise. This series will offer six
"make-or-break" decisions and the reasons they are so important. For several of
the decisions there are no "right or wrong" answers; their success lies in
their execution, regardless of the direction chosen.
Commodity agriculture is a unique enterprise, different than many other
businesses. The primary resources needed to farm -- land and equipment -- are
extremely capital-intensive. The inability to set prices and the uncertainty of
the weather contribute to significant risk. And the generational commitment,
rural lifestyle, work ethic and vocational notions of growing the world's food
supply often create a strong passion for the industry.
For these and other reasons, the concept of "passing down the farm" takes on
a dreamy, emotional and almost mythic tone. But the act of transitioning the
business is characterized by many critical financial and legal strategy
decisions. One of those decisions is whether some or all of the business assets
should be gifted or sold to the next generation. Regardless of which option, or
whether a combination, is chosen, the decision is critical for the following
SIGNIFICANT TAX PLANNING
Because of the capital intensity mentioned earlier and the appreciation of
land, most family agriculture businesses have significant equity, and that
equity is often held by the senior generation. Sometimes it is held personally,
for example, through individual land ownership. Other times it is held by
entities such as corporations or partnerships.
If there is generally over $5 million in equity per person (or $10 million
per couple) -- which is not hard to envision with current land and equipment
prices -- moving that equity to the next generation in the form of a gift
requires deep thinking about the estate tax implications. Should one use their
estate tax exemption (the amount that can pass tax-free) during their lifetime?
Or should they wait until they pass so that heirs receive a step-up in the
basis of the assets? If the assets are held in a corporate entity, how are the
shares or units of the entity valued? And for amounts over $5 or $10 million,
what is the best gifting vehicle and timeframe?
In looking at a sale of the business to the next generation, how will the
strategy affect the senior generation's estate and income tax position? What
tax efficient methods exist to affect the younger generation's purchase? And
those questions arise right along with some bigger-picture issues: Where does
the younger generation come up with the money to purchase the business, and how
is a price established? These kinds of questions require significant time to
explore, analyze and reach a conclusion.
Older parents, sometimes only half-joking, occasionally tell me that they
hope to enter the last year of their life with just over one year's worth of
money on which to live. Their point is that money has complicated the family
relationship, and that having no money to pass to the next generation might
leave the family in a better place.
The reality is that if there are multiple siblings in a family, there are
almost certainly multiple opinions about who is benefitting from the parents'
generosity. If you toss a business and significant wealth into the mix, those
opinions can lead to assumptions, hurt feelings, questions of trust and broken
If a sibling returned to the business while others did not, the transparency
of the transition may come into question depending on the gifting or sale
strategies mentioned above. The issues of fairness or equality become a focal
point of the conversation. In short, the business transition process becomes an
element -- maybe even an "elephant in the room" -- in the communication among
and between family members. And because money and emotions and historical
relationships are involved, the stakes are high.
Buying an agriculture business often includes financial sacrifice, delayed
gratification and a strong work ethic because family capital is directed toward
the acquisition of assets that generate revenue over a long period of time. But
when the business transitions from one generation to the next, the gift or sale
decision offers some level of choice between continued growth of the
enterprise, or an internal recapitalization. In other words, buying family
members out of a business affects the family's collective capital position
differently than leaving family money inside the business. It leaves less
available for growth.
Having less money available for growth is not necessarily bad; it is simply
a constraint that requires planning. But keeping family capital inside the
company creates options and increases the flexibility around growth. If
opportunities arise, money that would otherwise be committed to buying out a
family member can be used to purchase additional revenue-generating assets. One
parent recently said to me, "Why should my kids buy me out when we can buy more
land and grow the business?"
Gifting or selling the business to the next generation is a strategic
choice. It involves research, trade-offs, consequences and, most importantly,
the development of a plan. Spending time talking with your advisers and family
members about the approach that best fits your organization will provide
clarity as you consider the future of your closely held business.
Editor's Note: Lance Woodbury writes for both DTN and our sister
publication, The Progressive Farmer. He is a Garden City, Kan., author,
consultant and professional mediator specializing in agriculture and
closely-held businesses. He will speak on preparing for a family business
transition at a pre-Ag Summit DTN University workshop Dec. 7 in Chicago. For
details go to http://www.dtnagsummit.com/ Contact him at
Copyright 2014 DTN/The Progressive Farmer. All rights reserved.
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