Goals, communication essential to farm transition process
MANKATO, Minn. — Established farm families sometimes shy away from writing a transition plan because they fear it means they will have to stop farming when it's implemented.
Nothing could be further from the truth. Families need to put a plan in place to protect the legacy they've built and want to continue, said Gary Hachfeld, a University of Minnesota Extension educator who specializes in agricultural business management and who teaches seminars on farm transitions.
The right time to develop a plan is as soon as an heir indicates a desire to continue the business, Hachfeld said. The plan should ensure that mom and dad's wishes come true as do the dreams of the farming heir. A plan protects against unforeseen circumstances.
A plan also is needed if the heir is unrelated or not a direct descendant of the owner.
Resources are available to help families write a transition plan. Minnesota's farm business management professionals can offer recommendations and there are several professionals who walk families through the process.
Iowa has the Beginning Farm Center and Minnesota has the agricultural business management website, which is brimming with handouts on farm transfers and estate planning. A calendar features upcoming workshops, including popular programs on long-term care and farm transition estate planning.
The handouts are a starting point, Hachfeld said.
The other important aspect of a transition plan is a personal estate plan. They are two separate processes, yet they both need to be done and need to be complimentary, he said.
A personal estate plan includes a will or trust, power of attorney, health care directive and Health Insurance Portability and Accountability Act documents.
These documents need to be done yesterday, Hachfeld said. They need to exist whether or not a transition plan is in place.
The starting point for both the transition and the personal estate plan is to sit down as a family and lay out goals for the business and for personal assets and for mom and dad in retirement. Prioritize those goals, he said. The goals become a roadmap -- a guiding star as farm families move through the process of meeting with a team of professionals to put together a transition plan. The team may include an attorney, accountant, insurance agent, financial planner, banker, farm business management instructor and others.
"That goals list is the document you take to that team," Hachfeld said. "You need to feel comfortable and trust the team."
It sounds simple, but the discussions will be difficult, he cautions. Most families want to treat all of their children equally, but equal may look different in the eyes of the child who has been farming with the parents for 10 or 15 years than the siblings who have left.
John Baker, an attorney with Iowa State University Extension and administrator of ISU Extension's Beginning Farmer Center, offers this scenario: If a farm business is left in undivided interest to five children and four haven't worked on it, is it fair to the one who's farmed as the assets may not have been there without that person's contribution?
Transition planning is particularly uncomfortable because it's talking about what will happen when you are dead, Baker said. Also, entrepreneurs don't like to plan; they like to act.
There are five general areas where confusion may arise when putting together a transition plan. The first is timing and the second is where to meet. It's probably not a good idea to bring up farm transitions at Christmas when the family is gathered around the table. Most businesses meet in board rooms.
What is the person's role in the business? The role in the family isn't changing in the transition.
Be sure everyone understands the words used. Try to use a business vocabulary.
Resolve conflicts that naturally arise. In the upper Midwest it seems that conflicts are ignored until there's a stressful situation. Baker said he can tell if there's a burr in someone's saddle if the phrases "you always" or "you never" are uttered.
Every farm is unique, so every transition plan is unique as well, he said.
"Ultimately, you're the only person who can say what you want," Baker said.
In the five-hour program taught by U of M Extension, the first step is each individual involved in the process sits away from other family members and writes goals. Next, the individuals in each couple sit together and try to come up with a combined goals list. Third, the couples come together and try to create one list for their families, themselves and their business.
The ability to communicate is essential to crafting a successful transition plan, Hachfeld said. An estate plan won't work where there is disagreement. If a family has discord and can't get along, maybe the best thing is to part ways. He's seen families broken apart by the inability to find a consensus.
Once a family is ready to write a transition plan, they need to find an attorney that focuses on business transition, personal estate planning or elder law.
Hachfeld provided a list of web resources to find attorneys and said that while not all attorneys belong to those organizations, it is a place to start. Most attorneys offer a free hour of consultation. Use that hour to quiz them and see if they are what you are looking for.
"If it doesn't feel right, it's probably not right and you need to ask more questions or find someone else," Hachfeld said.
Once the transition plan is written, mom and dad need to ask lots of questions and need to be able to explain the plan to the rest of the family. They should say what it does for them and why they decided to go this way.
Countless people have a plan and they don't have a clue what's in the plan, what it does for them or why it's in there, he said.
Things typically go a lot smoother if mom and dad explain the plan to everyone rather than having the children hear about it first from the attorney after their parents have died, Hachfeld said.
It could take a year or two to write the transition plan.
He said another essential item for everyone to plan for is long-term health care.
"I think it's more important than tax planning."
A semi-private room in a nursing home costs $75,000 to $85,000 annually; an assisted living facility costs $40,000. Most people are complacent and think they won't live in a nursing home. Statistics say that one out of two people will live in a nursing home, and one in 10 will live there for more than five years. Forty percent of the people residing in nursing homes are younger than 65.
The probability of long-term care being an issue for any individual is huge, and it can cripple a farm business.
Many folks think Medicare or Medicaid, known as Medical Assistance in Minnesota, will pay for care.
Medicare will pay for up to 100 days of care, but rules apply.
There are basically four ways to pay for long-term health care in Minnesota:
• Self-insure, but this could put the business at risk.
• Self-pay, which is another potential burden on the business.
• Give away all your assets to your children and assume they will take care of your financial needs for 60 months.
•Buy long-term care insurance. This is the only way in Minnesota at this point to shelter or protect assets. A life estate done prior to Aug. 1, 2003, and a true irrevocable trust, done before July 1, 2005, should protect assets.
A lot of financial planners and most insurance agents sell long-term care insurance. There are two types of long-term care insurance: The standard that pays for long-term care and a hybrid that is life insurance with a health care rider. This policy draws off the death benefit to pay for health care costs.
Hachfeld suggests people put an inflation rider in their long-term care policy so it increases each year to keep up with increases in cost. Pay attention to the period of time the policy takes before it kicks in and how many years it provides coverage for and what facilities it pays for.
Most financial planners advise buying long-term care insurance when you are between the ages of 50 and 60.