What Should I Do? Jesse J. Richardson, Jr. Associate Professor Urban Affairs and Planning Virginia Tech Blacksburg, Virginia Farm Business Succession and Estate Planning Pre-conference Session National Risk Management Education Conference April 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