The amount of wisdom in the agricultural community is astounding. Unfortunately in today’s world, the lack of wisdom outside the agricultural community is equally remarkable.
My beloved mother continually says, “If you don’t have anything nice to say, don’t say anything at all.”
With that in mind, let’s focus on the wisdom of the agricultural community.
Many people commented on January’s column titled, “What’s in a name when it comes to land transfer?”
One gentleman, while lamenting the future of his community being “gobbled up” by investors who do not live in and do not patronize the local community, said to me, “There aren’t many names in a plat book that were there 50 years previous. The concentration of land ownership in the next 50 years will be worse than the last.”
The cold weather prompted a poignant two-liner from a man I have great respect for when talking about our lost sense of value in society, “Either you stand for something or you don’t stand for anything. If you have a flat tire when it’s 20 below zero, you’d better have a lot of clothes because you may be waiting for a long time.”
A farming son who had confidence in the relationship with his family members told me, “We would be better off if we all followed the Bible and the FFA Creed more often. I’m old school enough to think my parents will haunt me from the grave if I don’t do the right thing.”
The fourth paragraph of the FFA Creed says, “I believe in less dependence on begging and more power in bargaining — in less need for charity and more of it when needed; in being happy myself and playing square with those whose happiness depends on me.”
“I plan on getting out of the cab and into the box,” was said by almost every farmer I have ever known.
Not to be outdone, a frustrated friend stated while reviewing his 35-page proposed farm transition plan, “Whatever happened to just working hard and dying?”
Farmwives are the glue that hold our families and communities together. They exhibit grace, faith, confidence and patience while handling the emotional struggles of balancing family and business.
I heard this week, “If it will fit in the living room, you can buy it” and “If you buy another farm, I get a new kitchen and a screened-in porch.”
A heartfelt smile ensued as a widow recalled the early days with her farmer fiancé, “I called him the morning of our wedding and said, ‘I get the white meat and I don’t do bookwork’… is it still on?”
Telling it like it is when sitting across the table from a farmer is a common occurrence. When discussing transition issues for family land that appraised at $10,000/acre with a cash flow of $250/acre to make purchase payments, I was told, “We have a rule in our family that if it won’t pay for itself, then you shouldn’t buy it.”
And one of my all-time favorites when describing a well thought out (or lack of a well thought out) business plan, “Good fences make good neighbors.”
There are many C-Corporations in the farm community. Some were created as a tool to protect farms from creditors of the ’80s. Others started as a tax-shelter with a separate tax bracket, separate fiscal year and the ability to minimize self-employment taxes.
No matter what the reason they were created, a majority of C-Corporations now are dealing with the reality of a different generation of ownership, with the consequences of deferred tax liability of highly appreciated farmland.
After Generation One has passed on (and sometimes even before they pass), Generation Two will inevitably ask hard questions that will “test your family’s fences.” Why doesn’t the corporation pay a shareholder’s dividend? Can the corporation pay for my health insurance or pay me a salary? How much are the shares worth and how long would it take to cash them out?
A good agreement is one that has a process to mitigate a potential dispute that may arise when an amicable resolution cannot be reached by negotiation.
1. Either a President, Board of Directors or a Manager should have the authority to pay bills and make improvements to the property — even if the shareholders may not agree to “spend their own money” for upkeep. An example would be the authority to spend 10 percent of the gross revenue to fix and maintain tile, conservation practices or structures.
2. Any agreement should identify a class of permitted owners. By default, this also identifies everyone else as the class of non-permitted owners. As an example, a permitted owner class may be any lineal descendant or a trust for a lineal descendant where a spouse could be an income beneficiary.
3. A “call” option will give the shareholders first, then the entity the right to buy shares immediately from a non-permitted owner.
4. A “put” option allows a permitted shareholder the right to sell their shares, as it isn’t fair to “force continued ownership” in an illiquid farm entity.
5. Lease options provide a family member the ability to farm the land with an annual renewable lease using either a crop-share formula or a cash rent rate set by the Iowa State University Annual Cash Rent Survey for the active farming heirs (and future active farming heirs).
6. A family farm entity (with a good set of initial rules) should require a super majority vote so owners will have an equal voice and not be outvoted. As an example, an 85 percent required vote to sell or buy land, to change the agreement or to collapse the entity, with five 20 percent owners, would provide all siblings the opportunity to keep the family farm.
7. Income Payout is where a C-Corporation that has its own tax bracket and other pass-through entities differ. Ideally, the entity would pass-through income to its owners so all heirs can receive “return on inheritance.”
8. Price and terms are where the “rubber meets the road” in a shareholder’s agreement. A sample process to price shares is the appraisal of the company’s underlying assets, less liabilities, less deferred tax liability if the corporation were liquidated. The share price may then be reduced by a nominal percentage discount for lack of market and lack of control for a minority shareholder with a 10 percent down payment with 25 annual payments at the government’s established Applicable Federal Rate (AFR) of interest.
We need to do whatever we can to preserve and replicate our unique and irreplaceable way of life.
My hope is that through wisdom and logical thinking (or respect for your wife/mother), each of you will have the opportunity and the resources to preserve your family farm as well as the community in which you reside.
For 26 years, Steve Bohr has been a partner in the farm continuation firm of Farm Financial Strategies, Inc. For additional information on farm continuation issues or if you have a question please contact Steve via email at Bohr@FarmEstate.com or by phone at 1-800-375-4180.