Planning for Intergenerational Farm TransitionJesse J. Richardson, Jr.

Virginia Techjessej@vt.eduBob Parsons

University of Vermontbob.parsons@uvm.edu

Women in AgriculturePreconference-

Risk Management: Farmers as Food Systems ExpertsMemphis, Tennessee

March 27, 2012

Introduction

• Transferring the Farm program in Vermont

• Farm Transition Program in Virginia • Brief points to remember with

business entities• Advanced business entities• Business agreements• Conclusions

Transferring the Farm

• Series of workshops throughout New England

• One day- attorney; farmer panel• Videos: http://www.uvm.edu/farmtransfer/?Page=videos.html• Virtual workshop:http://www.uvm.edu/farmtransfer/?Page=ttf.html&SM=ttfsubmenu.html

Virginia Workshops

• Half-day introductions• Full-day introductions• 4-part and 5- part intensive (half-

day, one day-a-week, 4 or 5 weeks)

“The Magic LLC”

• Limited Liability Company is a separate legal entity that promises one level of taxation and limited liability

• Is limited liability really limited liability?• Will a LLC solve all of your problems?• Getting an LLC because your neighbor has one is

not a good reason• People get hung up over the tool instead of the

goal• Forget about the liability and realize the flexibility

of the business agreement provided by LLC

Women’s Roles

• Census of Agriculture shows a huge spike in women as “primary operator”

• More daughters are the incoming farmer• Women likely to outlive husbands, will be making

decisions on own if not addressed earlier• Women more communicative than men• Women more likely to want equality in treatment of

children• Women very important in getting the process started

Advanced Techniques

• Combining entities can aid transition and take care of off-farm heirs

• LLC owning land with another entity operating business- separates returns to land and returns to labor

• Should operating entity be LLC or C-Corp

Advanced Techniques

• LLC to all children and C-corp to child taking over operation? Can use long term lease. What happens to the next generation?

• Don’t worry about the next generation- Have faith that they will work it out? Agreement must be flexible, however, to allow for change

• How is best way to enable on-farm heirs to control use of the land while provide some ownership to off-farm heirs?

Precautions

• Watch out for special state or local rules

• Watch out for quirky tax rules

• In New Hampshire, for example, when land is transferred to an LLC, a 1.5% transfer tax must be paid

• In Vermont, homestead tax law is unclear when land is owned by an LLC.  LLCs are not a people.

Conclusions on Business Entities

• Limited Liability is an illusion!

• With partnerships, unlimited liability is not an illusion

• Get adequate liability insurance!

5 D’s and Business Agreements

• Death• Disability• Divorce• Disagreements• Disaster

Business Agreements- Control

• Should appoint a manager or managers

• May have officers/directors

• Responsibilities and expectations should be clearly set out

Business Agreements- Control

• Two signatures required for checks?• What happens if manager dies,

leaves, becomes incapacitated? (Wills and Powers of Attorney don’t work here)

• Majority vote or supermajority for member action?

Business Agreements- Buyout Provisions

• Set out formula for determining buy/sell price- use book value or other easily determinable number; keeps price down, but must be evenly applied- no exceptions

• Set terms of buyout- installment purchase over a number of years, reasonable interest rate

• Use of life insurance to fund buyout of deceased owner’s interest from surviving spouse/children?

Business Agreements- Termination

• When and how can business continue if a technical termination?

• If business terminates, how are assets to be distributed?

Business Agreements- Protection from Divorce

• Limitations on transfer and ownership of business interests; for example, only direct lineal descendants of Grandma or Grandpa can be owners (what about adopted kids?)- keeps the outlaws OUT!

• Consider possibility of divorce when crafting buyout provisions

Business Agreements- Protection from Divorce

• Installment sales

• Prenuptial Agreement is best way to protect business from divorce- full disclosure- both parties represented by

counsel- no unconscionable provisions

Business Agreements- Disability

• Disability insurance for managers and key persons

• Contingency plan in case of disability

Sample Business Agreement Provision-Ownership

Restrictions on Ownership and Transfer. Only direct lineal descendants of Jesse J. Richardson, Jr., of Blacksburg, Virginia may own an interest in this business. Any transfer to anyone other than a direct lineal descendent of Jesse J. Richardson, Jr. shall be void and of no effect.

Exception to Ownership Provision

No transfer to anyone other than a direct lineal descendent of Jesse J. Richardson, Jr. shall be valid unless a 2/3 majority of the owners of the business vote to admit the new owner to the business.

Right of First Refusal

Sale of company shares. No share or ownership interest in this company may be sold without the seller first offering the sale on the same terms and conditions to the company, then to each shareholder. Written notice shall be given to both the company and the shareholders. The company shall have ten (10) business days to respond to the right of first refusal. The shareholders shall then have five (5) business days to respond.

Setting the Purchase Price of the Business Interest

Purchase of Shares of Deceased Shareholder or Ineligible Owner. If a shareholder dies or becomes incompetent, or if the shares come into the hands of an ineligible shareholder by divorce or operation of law, the per share purchase price of the shares shall be the book value of the company divided by the number of shares outstanding.

Terms and Conditions of Company Purchase

Terms and Conditions. If the company becomes obligated to purchase the shares of the company under the provisiosn of this agreement, the purchase price shall be paid as follows: semi-annual payments amortized over a 15 year period, at an interest rate set at prime based on the date the obligation was incurred.

Separating Ownership and Control

• Gift ownership units to off-farm and on-farm heirs

• Gift participating units only to the on-farm heir

• On-farm heir holds all of the votes, thus control

• If on-farm heir decides to sell land, off-farm heirs share the proceeds

Conclusions to Business Agreements

• Anticipate the unexpected• Plan for the worst-case scenario• Cover all your bases• COMMUNICATE• PLAN