after downing a 6-pack, may have just as much right to the north 40 as you do. “For many, ranch succession is not something they
want to talk about,” says Jacqueline Davie, a fi nancial planner with Lincoln Financial Advisors Agribusiness Service in Houston. “It’s important for the ranch owner and his or her heirs to meet together and jointly discuss what will happen to the operation.”
Families work too hard and invest far too much time, money, blood, sweat and tears not to ensure that their op- eration is protected from unforeseen events in the future.
Davie was raised in Katy. She is an active member
of Texas and Southwestern Cattle Raisers Association (TSCRA) and is past president of the Texas Coastal CattleWomen’s Association. She knows beef produc- tion, from doctoring cows to premium calf sales. And she has helped hundreds of ranch families get their ranch transfer situations corralled. “Farm or ranch succession, it’s a real fear for ranch
and landowners young and old,” Davie says. “For a lot of younger and middle-age operators, they don’t think about taking a particular asset and carving it out so it’s protected for their children. They need to make sure they don’t unintentionally disinherit their children in the event they die and their wife or husband remarries.” Tiffany Dowell Lashmet, Texas A&M AgriLife Exten-
sion Service agricultural law specialist, agrees that it is critical to think through how a marriage, divorce or death could impact the farm or ranch business. “There is no one-size-fi ts-all answer for how best to
protect the operation,” Lashmet says. “Differences in family dynamics, state laws and fi nancial situations should all be taken into account when determining the best approach for your farm.” Davie notes that the long-time trend for an aging
of farm and ranch owners continues. Between 2002 and 2012, U.S. Agriculture Census statistics indicate that principal owners age 34 or younger dropped from about 123,000 to about 120,000, down 2.6 percent. However, principal owners 65 and older increased from about 558,000 to about 701,000, up 25.7 percent. Land owned by operators 65 and older totaled about 240 million acres in 2012, up 19.4 percent from 2002.
76 The Cattleman December 2016
But for beginning producers, the 469,000 acres they owned were 20.9 percent lower than in 2002. Thus, with more farm and ranch ownership by those
65 and older, there are more operations that will face farm or ranch transfer decisions sooner rather than later. “It will save a lot of family in-fi ghting if families discuss the wishes of legal owners now, as well as how the succession plan is set up,” Davie says.
Succession strategies to consider Davie lists several farm succession strategies that
ranchers may consider. These include Business Entity Gifting, Farm Buy-Sell Agreement, Installment Sale, Self-Cancelling Installment Note, Grantor Retained Annuity Trust, and Installment Sale to an Intention- ally Defective Irrevocable Trust. “Entity gifting is the most common strategy we’re
seeing now,” Davie says. “Depending on how the cli- ent structures the plan, the owners provide part of the estate as a gift to heirs. This reduces the estate taxes that may be due upon the owner’s death.” Basically, the rancher transfers the business to an
entity, such as in the form of a limited partnership. LP shares are gifted to heirs who, depending on marriage and/or blood relationship, may be broken down into voting or non-voting heirs. The determination of vot- ing and non-voting heirs is a major reason for detailed communication among all potential heirs. In the Family Buy-Sell Agreement, the ranch is not
removed from the estate for transfers at death. Instead, the rancher has one or more heirs he or she would like to transfer the farm or ranch to at retirement, disability or death. Appraisals are made of land and other assets and a growth rate is established to determine value. In the Installment Sale agreement, the rancher sells
the ranch at fair market value to one or more children. The sale is reported over time in exchange for a low interest installment note. Davie says this serves as an estate freeze and does not trigger gift taxation. The Self-Cancelling Installment Note is effective
if the current owner has health issues. The program includes a risk premium and estate tax savings. The note cancels upon death. Davie says the Grantor Retained Annuity Trust
(GRAT) may be best for a profi table or highly appreci- ating asset or business. It provides an income stream during the term of the GRAT. The remainder passes to GRAT benefi ciaries without a gift tax. It is likely not suited for assets going to grandchildren, Davie says. The Installment Sale to an Intentionally Defective
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