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From independence to partnership

Agriculture.com Staff 03/16/2012 @ 10:49am

By Dr. Donald J. Jonovic

In my last column, we looked at a question from C.B. (one of three brothers who've worked with their father more than 15 years, but mostly independently). They rent some land from Dad's 1,100 acres, and each farms his own. They own equipment separately, sharing as needed.

They've experienced the usual problems with loose partnerships like this. Labor isn't always equally shared, nor is commitment. Each brother works full time in town. Like most sleeping dogs, this one lay quiet until it was recently kicked by Dad's fail­ing health. Suddenly, they recognize they face serious long-term problems.

"How do we start now to work together?" C.B. asked. "What's more serious is the fact none of us has a will or estate plan."

Dr. Jonovic's solution

Last time, I suggested that these brothers must decide whether they want to be full-time farmers or landlords with a hobby. It's a question they've ducked too long, and the answer is essential to planning their future, particularly this year when the looming tax law changes are immense.

C.B. worries about approaching their dad about estate planning now, when his health is failing, and he's right. It can seem heartless and greedy. Instead, the brothers must decide how and to what extent they want to work and own assets together. Then, they'll have a set of questions and a natural reason to approach their father about the need to consider restructuring the business.

Assuming they don't expect to sell their land or Dad's land at his death, they have two options to choose for the future: either continue the current part-time model or move toward a full-time farm operation, maximizing use of all land, machinery, and equipment assets.

This decision is essential and fundamental to future planning. That's because the business model they select will dictate the choice of entities, manage­ment organizations, and owner agree­ments. (Selecting a business plan is one of the most significant decisions affecting the estate planning for any operation.)

For example, by choosing the part-time model, they eliminate the need to share assets, risk, and benefit. Each brother, in effect, would either become a tenant using family land (requiring an entity or trust holding that land) or an owner with his own share of Dad's land.

The main planning priority here becomes finalizing Dad's plan for the land after his death, creating appropriate entities and leases. Relatively simple.

If they see a better opportunity in working together as equity partners in an operating business and can agree on as­signing responsibilities and compensation, they'll have to take a different planning route, structuring their assets into appro­priate corporate forms. Most likely this would involve separating operating and land assets, perhaps using the flexibility and advantages of LLCs to define control, authority, and governance. There are many options. Much less simple.

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