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From independence to partnership
By Dr. Donald J. Jonovic
In my <a href=" http://www.agriculture.com/family/estate-planning/family-succession/prod..."
target="new">last column</a>, 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
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.
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.
Either way, discussions and decisions now are essential.
Farmers spend their lives making hard choices, meeting complex challenges,
facing reality squarely. Yet, when it comes to transition and estate planning,
they tend to do the exact opposite.