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A first-rate farm business

Bryan Kirkpatrick couldn’t
wait to go back home to farm. “I was sitting in a History of Western
Civilization class, and all I could think about was how I wanted to be planting
corn and beans,” he says.

So in 1969 he traded in a
college degree to partner with his dad, Robert. The two worked hand and glove
on the farm near Greentown, Indiana, for 39 years.

“I was fortunate to pick up
land from neighbors and to get started using Dad’s equipment,” he says. “After
I was renting as much as he owned, we split it 50-50.”

They still were going strong
in early August 2008 when Robert, 83, hauled seven semi-loads of corn. “The
next thing I knew, three days later Dad was sick and wearing out,” he says.

The 56-year-old realized he
needed to ask his dad three decades worth of questions in a compressed time
frame. Robert died 19 days later.

“When you’re working so
hard, you don’t spend much time thinking about one of you not being there
someday,” Kirkpatrick says.

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Although his dad had a plan
in place, Kirkpatrick and his sister, Janet, found out it could have been
improved and updated. “According to the will, I could farm as long as I
wanted,” he says. “But I had been afraid to ask too much. I didn’t want Dad to
feel I was pushing him out. After he became ill, we talked about it. Now I know
he wouldn’t have been upset.”

With help from his attorney
and accountant, Kirkpatrick took some defensive steps. “Farmers work hard for
their land and the business,” he says. “There are legal steps they can take.
Sure, getting help costs money. But it’s their future.”

Plan Is Ongoing

Today Kirkpatrick says he’s
gained from the experience. He and his wife, Susan, have an estate plan that
they’ve discussed with their three daughters, Andrea, Laura, and Jenna, and
with Kevin Breisch, who farms with them.

“I’m fixing it for my kids,”
he says. “You have to know where you stand if you lose your business partner.”

With help from an attorney,
they’ve studied their options. “You need a good estate planning attorney,” he
says. “If you don’t have one, get one. A good accountant is equally important.
They work hand in hand.”

Kirkpatrick is ahead of the
curve. In 2007, 57% of U.S. farmers were over age 54. More than two thirds say
they haven’t identified successors, and 90% say they don’t have an exit plan or
know how to develop one, according to the 2010 FarmLasts Project research.

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The Kirkpatricks realize
that many more decisions lie ahead. Estate and transition planning are a work
in progress.

“It’s a learning process,
and it never seems to end,” Kirkpatrick says. “Along the way, you need to take
time to talk about all of the what-ifs.

For over 20 years, Jolene
Brown has worked with farm families to help them anticipate the what-ifs of
farm business.

Based on her experiences,
the West Branch, Iowa, farmer, consultant, speaker and champion of family-owned
businesses makes a distinction between a family-first business and a
business-first family.

“In a family-first business,
decisions are most often based on emotions, feelings, personalities, genetics,
wishes, avoidance, habits, and assumptions,” she says. “With luck, those
decisions work out well for everyone. But the majority of times, it leads to
problems – first within the family, then within the business.”

Instead, Brown advocates
being a business-first family. “These families base decisions on an agreed
mission, written goals, code of conduct, discussions, quality communication,
legal and written documents, and carefully managed risk,” she says. “A
successful business-first family doesn’t sacrifice family, but it values family
and has the family’s best interests at heart. That’s why it does the business
correctly.”

Don Jonovic, “Can Their
Problem Be Solved” columnist and founder of Family Business Management Services
in Cleveland, Ohio, has more than 35 years of experience advising family
businesses.

“People often tell me they
can’t treat a family member as a business partner because they’re family,” he
says. “But only if families take care of the business can they do other things
families do best. Clarifying their partnership comes first.”

In the next three pages,
Jonovic and Brown discuss what it takes to achieve this goal. To gain the best
tools, see page 32 for more on attending the Generating Success conference.

Gain Respect And Trust

Both Brown and Jonovic agree
that people in the family business are the most important resources. What,
then, gets in the way of families putting their farm business first?

“Problems occur when people
don’t respect each other,” Jonovic says. “Respect means different things at the
family and business levels. It might mean you treat each other fairly. It might
also mean you commit to putting agreements in writing.”

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Jonovic says that during
discussions with farm families, he often asks all members to pretend they’re
not related. “You’d be amazed at the clarity this brings to agreements under
discussion, as well as to defining how individuals take benefit from the
business,” he says. “Respecting each other is the best pathway to accurate
communication in a partnership.”

Jonovic says families also
consistently raise another issue: trust. “People tell me they’ve lost trust in
a family member,” he says. “It turns out the person hasn’t done anything
criminal. And when it comes right down to it, the one who has lost trust would
put his or her life on the line for the other one.

“So I usually ask, ‘Why are
you in partnership if you don’t have any trust? Why don’t you get out?’ They
usually back off.”

What else can they do?
“Families need to examine the real source of their broken trust,” he says. “Can
it be healed? They may have reason for concern or insecurity. But usually the
issue isn’t trust.”

Jonovic adds, “Trust is very
fragile. It’s not strong enough to hold a family business together. It must be
supported by written agreements.”

Brown concurs. “You have the
legal right to distribute your estate as you wish,” she tells farmers. “But if
the estate assets affect business continuation, you need to communicate the
plan early on so all can prepare emotionally and financially for the future.

“Too many times, farmers
confuse a conversation with a contract,” she says. “Words in a conversation
sound good. Words in a contract make sure your word is good.”

Pack Your Business Toolkit

Brown suggests that families
create a chart detailing business roles, job descriptions, and standards.

“Hope is not a good business
strategy,” she points out.

She suggests these specific
tools:

• Goals

• Business Plan

• Job Descriptions

• Compensation Package

• Code Of Conduct

• Buy/Sell Agreement

• Meeting Procedures

Jonovic agrees. “The
business can succeed over time even if the family fails to plan, but it’s not
very likely to be a very happy family,” he says.

He advises families to focus
on these four steps to achieve business growth.

1. Fine-tune your
decision-making process. This means that everyone knows – and agrees – about
who is able to make what decisions and how they’ll be made.

2. Reach agreement on your
shared objectives. “Ask what you want for the business and what you want from
the business,” he says. “Resolve differences.”

Meet annually or
semi-annually to discuss family issues, including growth expectations,
risk/return levels, and family culture/values.

Meet quarterly to cover
strategic issues, such as structure/capital, leadership/pay systems, owner
value/strategy.

Meet weekly or monthly to
focus on management issues, including, operations, budgets, and accountability.

Jonovic suggests that
building owner value and meeting the needs of the business and individuals
should take precedence over income tax planning. “Manage your future, not just
your taxes,” he says.

3. Elevate transition
planning to the level of strategy. This includes discussions about ownership,
rights to sell, and how agreements can be adjusted.

4. Develop a leadership that
can manage tomorrow. Estate planning is a critical linchpin, but it’s only one
component of a business succession plan. Business assets must be transferred,
and maintaining good management is key.

“Gradually transition
management and leadership of tasks from one generation to another,” Brown says.
“The next generation knows things you need to know but may not want to learn.”

Robert Anderson, Redwood
Falls, Minnesota, specializes in providing tax planning and financial
consulting to families preparing to retire or are in the process of
transferring a farm to the next generation. “A strategy for transferring the
farm has four basic building blocks,” he says.

1. Retirement plan for
parents that assures them of enough income to live on.

“A lot of people start a transition, but then discover there’s not enough
income for two families,” he says.

2. Business plan for the
successor.

3. Financing plan for the
successor.

4. Nonfarm heir plan for
siblings.

“Many families wrestle with
this fourth step,” Anderson says. “It’s not critical to the transition. But
they want the family to remain successful after the transition.”

Estate Tax Settled?

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Passage of a new estate tax
law late last year removes a major source of uncertainty from business
planning. The 2010 expiration of estate tax did not include a stepped-up basis
on inherited property on assets sold by heirs.

The new law, beginning this
year and over the next two years, will allow $5 million per person ($10 million
per couple) to be exempted, with a top marginal tax rate of 35%. “After
December 31, the gift tax also is $5 million. And if it’s not used during life,
it’s available at death,” says Roger McEowen, Iowa State University professor
of ag law.

For estates arising on or
after January 1, 2010, and before January 1, 2011, the law allows a choice
between 2010’s law (no estate tax and modified basis) and the $5 million
exemption and full step-up.

“This means that most
estates will automatically get a full step-up in income tax basis, whichever
set of rules they utilize,” McEowen says.

The new law is the
second-lowest estate tax in 80 years. Although it may seem to erase the urgency
of planning, McEowen says farmers shouldn’t be lulled into complacency. “If there
is no agreement in two years, the exemption will revert to $1 million per
person in 2013 and a 55% top rate,” he says.

More Than An Estate Plan

Anderson urges farmers to
move forward with their business planning.

“When it comes to transition
planning, don’t let the estate tax tail wag the dog,” he says. “Farmers now
have the tools available to plan for the next two years, and this sets a
positive direction. Generally speaking, farmers have it ingrained in them that
the farm is their legacy, and the opportunity to pass it on is their goal,” he
says.

For farmers, like Bryan
Kirkpatrick, who plan to pass on the farm to the next generation, transferring
managerial control of the business and the business assets assumes as much
priority as estate planning.

He has made an appointment
with his attorney for an annual review of his plan.

“Most farmers want to be
hands-on, working in the field or in the shop,” he says. “But they have to take
time to talk about the what-ifs. That includes state estate tax, property
appraisals, and trustee fees. Someone needs to keep up and inform others of any
changes along the way.”

Brown agrees. “Farming can
only be a way of life for those who treat it like a business,” she says. “There
is a huge difference between saying something and actually doing something. Now
is the time for doing.”  

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