1. Transition Planning August, 2006
What do you want to happen to your farm when you are finished with it? Would you like for your children or nieces and nephews to farm it?
Succession Planning is going to cover what happens to your farm when you no longer farm. The term transitioning will be used quite a bit through the presentation and it is referring to moving the farm to the next generation that will operate the farm business.

2. Objectives
Identify strengths & weaknesses of the operation that will affect succession of the farm
Identify what you hope to accomplish through Succession Planning
Outline a Succession Plan
Understand differences in business entities

3. Transitioning Mission Statement Goals & Objectives Business Entities
Taxes
Communication
This session is going to envelop several things that go into making a Succession Plan and transitioning the farm to the next generation.

4. Transitioning
Many farm and ranch families have the long-term objective of “passing the business on to the next generation”
REALITY:
Only 30% of family owned businesses successfully transfer to the 2nd generation
Only 15% make it to the 3rd generation
Only 5% make it to the 4th generation
Why?
Possible Reasons – Could be an inconsistency of goals (for example, the younger generation may not want to take over the farm) or could be poor transitional planning
It could be too that the younger generation has never been allowed to make management decisions. Younger generation many times provides the labor, but not always given the opportunity to handle the paperwork and decisions of the farm.
Ex. Who decides what government programs the farm business will participate in? Who decided with the 2002 Farm Bill whether or not to update yields?
Unfortunately, less than one-third of family-owned businesses survive the transition from the first generation of ownership to the second, and only 13 percent of family businesses remain in the family over 60 years. Problems making the transition can occur because the business was no longer viable or because the owner or his or her children did not want it to occur, but usually result from a lack of planning. At any given time, a full 40 percent of American firms are facing the succession issue, yet relatively few make succession plans. Business owners may be reluctant to face the issue because they do not want to relinquish control, feel their successor is not ready, have few interests outside the business, or wish to maintain the sense of identity work provides. (Source Nancy Bowman-Upton US Small Business Administration 1991)

5. Successful transition planning is a process.
What are the businesses current strengths, weaknesses, financial position ?
Spend some time with all stakeholders developing a shared vision, objectives, and goals for the business and for family members involved.
Transitioning SHOULD be a part of the farm business plan. The business plan is the road map for the farm business.
If you do not have a farm business plan, it might be a time to develop one. You can still do succession planning without developing an entire farm business plan. Any planning you can do, is better than none.
(Take a couple of minutes … pull out your net worth statement from the first session…. Find 3 strengths and 3 weaknesses)

6. Develop a workable plan to move the business forward.
Implement the plan.
Monitor progress and, if necessary, modify or improve on the plan to keep the business on track to achieving the vision.
Where do you start? (click to next slide)

7. Step 1 Study your current business situation.
Look at financial records, including assets and liabilities
Now is when you could look at the asset and liability listing from the estate planning section to identify three of their greatest strengths and three of their greatest weaknesses (relative to succession planning)
You have already done part of this. Back in Class one each of you put together a Balance sheet listing your assets and liabilities.

8. Step 2 Develop vision and mission statements.
A vision is a long-term concept
A mission statement is a broader vision.
Vision – focuses on where the farm business hopes to be in the future
Mission Statement –an outline of the basic purpose of the business, in a brief concise statement that summarizes what is done, who it is done for and how the business conducts itself.
(Visioning Matrix handout) – blue handout

9. Step 3 Define objectives and goals for your operation. “goal-setting”
What do we want to achieve?
How can we go about achieving this?
Clearly defined, written goals are essential.
All farm managers have many ideas and plans, but it is not always clear to all family members. It is important that everyone is working together towards the same goals, rather than working towards individual goals.
The goals are your dreams for the business, with a definite timeline. The goals provide a benchmark for measuring progress. Objectives are longer term and more generic – such as “Increase gross income per acre” and the goal may be “Increase average soybean yield to 48 bushels per acre next year.”
Objectives and goals describe conditions that you hope to achieve and reflect hopes and dreams for your business or personal life.
Written goals provide a framework for achieving the mission and vision of the farm.

10. Step 4 “Business Structure” Three categories of business structure
1. Organizational Structure
2. Legal Structure
3. Financial Structure
Organizational Structure – Stakeholders (including employees) need to know what their role is in the farm, what is expected, who makes the decisions (now and in the future), who is responsible, and who is accountable.
Legal Structure - Currently, what form of business structure is used by the farm? Will it fit future needs? We will discuss the forms of business structure in more depth shortly.
Financial Structure – closely tied with Legal Structure. Is there funds to meet the farm objectives? Two types of financing – 1) Debt and 2) Equity.
Equity – is a contribution of resources in exchange for an ownership stake. This could be cash or non-cash, tangible or intangible. The ownership stake allows the investor to share in the farm business profits. Ex. A simple example of equity capital contribution is the contribution of owned land to a sole proprietorship farming operation. The “business” simply uses the land that is owned by the manager and profits accrue to the manager in return for his contribution of the land to the business.

11. Tax Considerations Involve Professionals
Another part of Succession Planning is considering the Tax Implications. This was covered in the first session, but we will review it, and point out a few things directly affecting transitioning and transferring.
There are tax ramifications to consider at almost every turn when planning to transfer assets. It is important to involve a tax advisor or financial consultant BEFORE making transfers.

12. Transferring Assets Sale Gift Through an Estate
Each method can have important tax implications.
Sale
For example, if one sells grain to a son, the sale amount will be taxed as ordinary income.
If selling a purchased asset like machinery or land or land, there is a potential depreciation recapture or capital gains tax involved.
Gift -Note Instructors: Can be covered quickly, since it was already mentioned in the Estate Planning section.
(For 2005, the $11,000 is correct. In 2006, update this slide $12,000. For years beyond that, you will need to check the annual gift exclusion amount.)
If the fair market value (FMV) of the gift exceeds the annual gift exclusion, then the amount of excess is subtracted from $1,000,000 credit, which is the amount the giftor is able to gift in their lifetime tax free. It has no consequences to the person receiving the gift.
Through an Estate – If assets are transferred at the time of death, the FMV of one’s net estate is subtracted from the remaining credit (i.e. each is allowed the $1,000,000 as mentioned above)

13. Determining Income Tax Basis
Defined… The cost to recover when an asset is sold.
The cost basis in the property is determined by how the asset was acquired plus the cost of any improvements made, less any depreciation taken.
The method of how the asset was acquired can be a big factor.
If one purchased land, no depreciation and made no improvements, the tax basis is the original purchase price.
Asset received as a gift – basis is the same as the donor’s (giver’s) basis at the time of the gift, plus any improvements made by the recipient, less depreciation taken.
Ex. A gift of farmland is valued at $160,000, but had a donor’s basis of only $25,000. If no improvements have been made or depreciation taken, the basis in the property is the donor’s basis of $25,000.
3) Inherited asset – The tax basis is the FMV (or special use value) assigned to the asset as it passed through the estate to the recipient – plus any improvements made, less depreciation.
Ex. Inherited farmland is valued in the estate at $160,000, with no improvements or any depreciation in prior years, the tax basis is $160,000. If the recipient were to sell the farm for $300,000, there would be $140,000 of gain ($300,000 - $160,000 basis) subject to the capital gains tax.

14. Tax Basis & Transfer Plans
It is important for parents to consider tax basis.
Also, keep in mind the tax basis that heirs will have in the assets they acquire from parents.
Heirs basis will be determined in the same way as just discussed, so important to determine which method of transfer.

15. Transfer low basis property
Consider transferring through the estate
Stepped up basis
If it would be transferred by sale – there would be capital gains tax. If gifting, one merely pass the tax basis problem on to the heirs, since the parents basis would become the heirs’ basis.
Ex. Sally Smith sold 300 acres of farmland for $1,500/acre or $450,000. It had a tax basis of $100,000. Her taxable gain, whether the property was sold for cash or by the installment payment method, would be $350,000. Because of the sale, either Sally or her heirs must pay capital gains tax on the $350,000.
If however, Sally retained the property until her death, the estate would assign a stepped up basis of $450,000 (FMV).
The heirs could later sell the property for that amount and pay no income tax on the sale amount, as the new basis would be $450,000

16. Transfer high basis property
Consider selling or gifting.
If property has a high tax basis (near or above the present market value) then selling or gifting the property becomes a viable option. Ex. CD or cash
Work with a tax consultant, since there are limits as to the tax losses one can claim if the tax basis is higher than the present market value
Important – check out the tax ramifications of any asset transfer with a tax consultant BEFORE making the transfer!
Handout in book, at the end of this section include Pg from NCR-610F:
1) Methods / strategies when transferring current assets
2) Methods / strategies when transferring breeding stock and machinery
3) Methods / strategies when transferring real estate
4) Additional tools to aid the transfer process

17. Transitioning Mission Statement Goals & Objectives Business Entities
Taxes
Communication
This is the same slide that we started with at the beginning. We are going to stop and do a few worksheets, then come back and look more closely at Business Entities and Communication
[Have them work on the Visioning Matrix and Goals worksheet] - (blue sheet)
[Explain Goals & Objectives and how the works are to be completed] – (blue sheet)

18. Other Choices What if I have not desire to pass the farm on?
Sell the farm
Rent out ground and leave to heirs
Consider tax consequences before making decisions:
Farmland and buildings are treated as capital assets when sold for a gain.
When selling a farm:
Establish the cost basis of the farm, to compute the actual gain or loss. You will need the original cost, cost of improvements and previous claimed depreciation on any fixtures to the land.
Three types of improvements to real estate: 1) improvements subject to depreciation, such as farm bldgs, silos, fences, tile drains, 2) improvements such as construction of ditches, soil and water conservation expenditures – these are not depreciable, and thus are either claimed as farm operating expenses or capitalized (added to the basis), 3) improvements to the personal residence on a farm. These are not deductible for tax purposes, except for the part used for the farm business office or to house hired labor. These costs should be added to the original investment of the residence.
Alternative – instead of selling the farm, consider trading or exchanging it. This is particularly applicable if the present property has a low basis and/or there will be a depreciation recapture on newer facilities.
Work with a tax consultant beforehand

19. Questions
This would be a good break and have them fill out the vision matrix and goals worksheet.
Mary Sobba University of Missouri Extension Agriculture Business Specialist (573)

20. Communication Does this really affection Succession Planning?
When more people become in involved in the farming operation it becomes more and more important to have open lines of communication between all people. These next few slides will give some discuss communication types and we will look at some video examples.
[Show the Intro wmv file]

21. Communication Paternalism and Autonomy Theory
Paternalism is taking care of someone.
Autonomy is wanting to retain a person’s independence.
Examples from Scenario 1:
Paternalism: John wants Dad to slow down.
Autonomy: Dad wants to remain his own boss
Purdue University has done extensive work on Communication and the importance. We will be using some of their research information in this section.
[review clips ahead of time and choose one that shows this]
Ex. Scenario 1 dc version

22. Politeness Theory
The person who initiated the conversation is respectful of the other’s opinion.
What he or she says allows the other person to “save face.”
Examples from Scenario 3:
John: Do you see yourself coming back to the farm?
Brother: I always assumed you would take over
Play Scenario 3
[The wmv files for Scene 3 show this. This is a good place to show the ic and nc examples for Scene 3]

23. Communication Strategies
Direct control:
The speaker wants to take control.
Indirect control:
The speaker is flexible and will share the decision making.
No control:
The conversation is neutral.
Indirect Control --It allows for equal input so the other person can help solve the issue
No Control – no decision made
[Show clips of your choice. Ex. Scene 2, show the dc, ic and nc versions]

24. Other Factors Attitude Preparation Timing Behavior
All of these items play a role in how we convey messages to one another.
Attitude – Be respectful
Preparation --- remember what it was like to be in others shoes
Timing - ask other family members if they want to be involved
Behavior –be conscientious and aware of other family members
[Show clips of your choice and ask questions to see if class can pick out differences of Attitude, Preparation, Timing, and Behavior]
Before playing give a heads up to watch for the words, intent and actions.
What is an example of Timing – Scenario 4ic – including other family members
What is an example of Behavior – Scenario 5ic – Always reinforce that the parent is in charge of his/her health.
Discussion….
This would be a good time to --- complete the older generation (green sheet) worksheet and let them know there is one included for the younger generation (salmon sheet) too.

25. Questions
This would be a good break and have them fill out the vision matrix and goals worksheet.
Mary Sobba University of Missouri Extension Agriculture Business Specialist (573)