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Talk by Peter Callan at the 2011 Small Farm Family Conference
Citation preview
Saving the Small Family Farm and Saving the Small Farm
Family
Original Slide Presentation Developed by Dr. Alex White,Agricultural & Applied Economics ,
Revised & Presented byPeter Callan, Farm Business Management Extension Agent
"Managing the Farm Transition" Workshop
1
Transitioning the Farm To The Next Generation Is a Stop & Go Process
that is Convoluted &
often Walks the same ground many timesbefore a Successful End Point is Achieved!
2
Farm Transition Planning
Crucial to survival of the farm! Involves many topics
Goals Living arrangements & income needs Analysis of the resources & environment Estate planning Tax management Contingency plans (“What ifs”)
Most important factor is Communication!!
3
Getting Started
Must assess: Family members’ goals
Older/younger generation, spouses, heirs, etc. Personal goals and business goals
Family members’ abilities Operating environment Economic viability of the farm
Sounds like a business plan to me!
4
$1 Million Question for You You have $1 million in cash
Would you make plans to use it? Would you discuss your plans with family? Would you investigate your investment options?
Would you get outside help? Would you include it in your will? When would you do these things?
Ave. VA farm has more than $1 million in assets Would you answer these questions the same way
for your farm assets?5
Possible Transition Options
Continue to farm as a full-time operation Older generation is active partner
Ben Cartwright School of Farm Management
Older generation phases out of management Older generation gets out completely
Operate farm as a part-time operation Both generations involved vs. one generation
Lease the farm
Sell the farm Sell the farm and purchase a farm in another
area6
Goals
Business goals Keep the farm in the family, (ownership)
Keep the family on the farm, (operating that farm)
Keep the family in farming, or (operating a farm)
Keep the family from farming - Huh!
Older generation’s business goals Younger generation’s business goals
Personal & family goals Of all involved!
7
Possible Business Goals - Topics
More/less risk More/less debt Expansion/contraction of operation Increased/decreased labor effort Increased/decreased management
responsibilities No/dramatic change in operation
New enterprises, markets, etc. Time away from the operation
8
More on Goals
Family living needs US ave. of 2008 US average pretax/household
income ~$63,500 (BLS) Averages family living expenses ~$50,500
(BLS) Do you expect any retirement income??
“Non-farm” children Must clearly establish goals
Involve all relevant parties Compromise Communication is critical!!
9
Goals
Keep your main goals VISIBLE Mind reading not allowed! Communicate your goals! Revise your goals as necessary
10
Communication
It takes TWO to communicate Listening is critical Honesty and trust are critical Too often taken for granted by both parties Not always easy You CAN NOT communicate
Body language, expressions, actions Environment is important
11
Barriers to Communication
Privacy issues “family secrets”
Lack of mutual respect for each family member’s goals, age and experience
Personality profiles Chip off the “old block”
Using guilt to “control” family members
12
Is your family ready for the big conversation? Taking stock of family unity and shared
values What are your family's shared values and
traditions? How have previous generation used family
resources to perpetuate the shared values? How will existing family resources be used to
perpetuate the shared values for future generations?
13
Steps a family can take to prepare for open discussion about finances Each family member writes down answers to
the following questions before the meeting: Family members’ goals
Older/younger generation, spouses, heirs, etc. Personal goals and business goals
Family members’ abilities Can the younger generation manage money?
14
Steps a family can take to prepare for open discussion about finances cont.
Net Worth Statement for older Generation Income requirements for older generation What are the older generation’s goals in the
distribution of assets?
15
Steps a family can take to prepare for open discussion about finances cont.
Who inherits real estate and financial assets? Who inherits personal property?
Furniture, dishes, silverware etc. Family heirlooms
Who speaks to whom in your family?
16
Holding a Family Meeting
Who leads the discussion? Ben Cartwright rules of order “Golden” rules of family communication How to get people to speak? Rules of civility Respect for each family member’s comments
17
Holding a Family Meeting cont.
Avoid family secrets Discussion of fair vs. equal Third parties can help or harm the discussion
18
Fostering Good Communication
Have regular family meetings Discuss major issues candidly Leave your egos outside Meet AWAY from the farm/house Keep minutes of the meeting
Respect for each family member’s ideas Consciously work on listening Be open-minded Don’t gloss over or ignore problems – be open
19
Agreement on shared values for future generations Makes estate planning and tax management
issues easier to address Promotes family unity Perpetuates family values and traditions
20
Living Arrangements & Needs
Where will you live? Before, during, after transition On farm, off farm
How much money will you need to live? US average = 2008 US average
pretax/household ~$63,500(BLS) That equates to ~$400,000 of gross farm
income (84% Expense/Receipt Ratio) Need to develop a budget for family living
expenses
21
Sources of Income – Older Generation
Net farm income Continued draw from farm
Lease of farm assets Sale of farm assets (after-tax) Off-farm salary/wages Retirement income
Pension, Social Security benefits Personal savings & investments
IRAs, 401(k), taxable inv., real estate, etc.
22
Can You Afford to Retire?
Retirement living needs 60-80% of pre-retirement needs – this is not
realistic 100-125%
Some expenses hidden under the farm Increased medical expenses Travel, leisure, spoiling grandkids, etc.!! Retirement planning worksheet How long will your retirement funds last?
23
How Long Will $600,000 Last?
$30,000 $40,000 $50,000 $60,000 $70,000 $80,0001% 22.2 16.2 12.7 10.5 8.9 7.8
Real Rate 3% 29.6 19.4 14.5 11.6 9.7 8.3
of Return 5% 62.4 25.7 17.4 13.3 10.8 9.17% Forever Forever 22.7 15.7 12.2 10.09% Forever Forever Forever 20.3 14.3 11.2
Annual Living Expense Needed from Savings
Cell values indicate the number of years your portfolio will last.
Consider impact of inflation!
24
How Much Must I Have in the “Bank” If I Spend $50,000 per Year?
$200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,0001% 4.1 8.3 12.7 17.3 22.2 27.3
Real Rate 3% 4.2 9.0 14.5 21.2 29.6 40.6
of Return 5% 4.3 9.8 17.4 29.4 62.4 Forever7% 4.5 11.0 22.7 Forever Forever Forever9% 4.7 12.5 Forever Forever Forever Forever
Retirement Portfolio
Ignores any other sources of income
Cell values indicate the number of years your portfolio will last.
25
Resources: Abilities
Carefully analyze each operator’s abilities Production, finance, marketing, labor mgt. “Business” management
Organization, scheduling, creativity, innovation Listening, thinking, decision making Work ethic, trustworthy, honesty Personality profile
26
Operating Environment
Water, soils, land, & labor availability Adequate supply, adequate quality
On-farm facilities Condition, capacity
Infrastructure Supplies, financing, transportation,
processing, stable markets Regulations, zoning, urban pressure
27
Economic Viability
Depends on: Production capabilities Financial condition Marketing plan Operating environment
28
Cash flow, profitability, debt mgt. are keys successful farm transition Can the business generate sufficient
revenues to pay: Farm expenses Family living expenses Make debt payments Replace worn out capital items
Equipment Buildings
29
Is the Farm Worth Transferring?
If “No”, plan accordingly
Older Generation Sell or not? (Financial
planner) Estate planning (Attorney) Source of income for living needs?
Younger Generation Career plans? Source of income?
Discuss with all relevant parties Spouse, children, partners, non-farm kids
30
Is the Farm Worth Transferring?
If “Yes”, plan accordingly Communicate early and often Clearly lay out managerial responsibilities Develop a transition “timeframe”
Ownership and management responsibilities Communicate regularly!! Estate planning (Attorney)
How to treat non-farm kids!! Put the plans in writing – business plan Communicate, communicate, communicate!
31
Contingency Planning
Always have an escape route
Think about how to get out BEFORE getting in!
Be creative, flexible, open-minded
Look at opportunities vs problems
Write down your contingency plans
32
Consequences of NOT developing and implementing a transition plan
IRS has a plan for you! Legislation mandates how property is transferred
between generations Estate transfer laws may not implement the
older generation’s wishes for the transfer of land and family assets
Strained relationships between family members
33
Questions?
34