Content ID

56517

C Corporation Conflicts

By Myron Friesen
 
The Problem:
 
C Corporations are a major asset for some farm families. They can also cause major conflicts for the next generation when the parents pass away.
 
Submitted by J.T. in Illinois:
We have a successful farm operation. Many years ago, we were advised to establish a C corporation for income tax purposes. We were later advised to gift small percentages of the corporation to our three children for estate planning purposes (which we did). This corporation operates our whole farm and is worth at least $4 million. It mainly owns machinery and grain, but it also includes some land. Now, we can’t decide how to handle this distribution to our children. The corporation is vital to our farm operation, and our one farming heir knows it. How should we pass on the C corporation when some kids are farming and some are not? 
 
The Solution:
I understand your concern. A C corporation is a unique asset to distribute. It can be a great tool to manage income taxes and to grow the operation. Unfortunately, it can also be a nightmare to get out of.
 
The issue is that only one of your three children is farming. I can tell you that your nonfarming heirs will not appreciate the value of this asset nearly as much as you and your farm heir do. Usually C corporations do not generously distribute all of the profits. Most profits get plowed back into the operation. When your children inherit the corporation, two of the three owners may be greatly disappointed to discover that it offers very little in actual returns. Profit distributions to owners are often avoided because of double taxation issues. Imagine their frustration when they each inherit $1.33 million of an asset that provides little to no income. Now imagine they want to sell. Who is in the market to buy a one-third interest in a family corporation? No one, except maybe the farming heir. They will become equally disturbed when they attempt to liquidate the corporation and find out how much could be lost in taxes. 
 
On the other hand, your farming heir is worried because the siblings own two thirds of the shares. This means he or she is not in control. That alone should get your attention. One thing most farmers want is control of their own operation. Family is great as long as its members don’t tell you what to do, especially if they aren’t involved in the operation.
 
It’s pretty easy to say you shouldn’t have land in this C corporation, but the reason that you do is the same reason why Willy Sutton robbed banks – because that’s where the money was. 
In most situations, this is an asset that should go to the farming heir with some sort of buyout or cash compensation to the non-farming heirs. With the help of your advisers, a discount should also be clearly outlined and even explained. Almost every time I illustrate this from a nonfarming heir’s perspective, I relate it to a pair of golden handcuffs. If you can’t do anything with the asset, it doesn’t really matter how much it’s worth. 
In regard to the ownership interest you have already given away, you may want to either offer to buy back their ownership interests now or include a provision for a buyback later. Those owning minority interests in this C corporation will quickly recognize that any offer to buy them out should be welcomed. 
 
A good plan for this C corporation can keep all your children happy. Fortunately, you had the wisdom to recognize the problem, and your children will be happy you took the time to address the issue.
 
Your Generating Success Adviser Team:
Myron Friesen is co-owner of Farm Financial Strategies in Osage, Iowa. For the past 15 years, he’s worked exclusively with Midwest farm families to develop farm transition strategies. Friesen grew up on a Mountain Lake, Minnesota, farm. He owns and operates a 620-acre crop and livestock farm with his wife and four children.
 
Dr. Donald J. Jonovic is founder of Family Business Management Services in Cleveland, Ohio. He focuses on management, growth, and ownership transition issues.
 
Jolene Brown is a professional speaker, author, farmer, and family business consultant. Her tested business tools provide leadership and management solutions for the people who feed, clothe, and fuel the world. 

 

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