Compensating your ranch heirs

As the average age of U.S. farmers and ranchers grows older, and the value of agricultural land and other assets increases, succession and estate planning becomes more important than ever, says Dave Goeller, from the University of Nebraska’s North Central Risk management Education Center.

Presenting at the recent Range Beef Cow Symposium in Mitchell, Nebraska, Goeller said that in 1982, 22 percent of Nebraska farmers were under 35 years of age, while 17 percent were over 65. By 2007, those numbers had shifted dramatically, with just 7 percent of the state’s farmers below the age of 35 and 27 percent older than 65.

During that same period, the total number of Nebraska farm operators declined by 21 percent, farm operators younger than 35 years declined by 75 percent and the number of farm operators older than 65 grew by 49 percent.

Estate planning, succession planning and bringing the next generation into the operation’s ownership are critical for keeping the farm in the family, and also for stimulating innovation and growth, Goeller says. Businesses typically follow a pattern through several life-cycle phases. The life cycle begins with the introduction phase, followed by a growth phase, maturity phase and finally a declining or divesting phase. Older operators, with their businesses typically in the mature or declining phases, are more averse to risk than they were during their earlier, and without taking risks, the business does not grow.

Ideally, he says, operators should bring the next generation into the business ownership and management during the growth stage or early in the maturity stage, where their enthusiasm and willingness to accept risk can spark new growth.

Estate planning can take many forms, and requires expert assistance from accountants or lawyers, but Goeller encourages owners to consider strategies to transfer the farm or ranch as a viable business, rather than as a collection of assets. One aspect of this strategy is to account for the involvement of potential heirs in the operation and their contribution to its value.

He provides an example in which one of three siblings, Jimmy, returned to the ranch to work full time in 1990. The other two siblings built careers elsewhere. At that time, the value of ranch assets was $300,000. Split three ways, that would mean an inheritance of $100,000 for each sibling. But, in the years since then, the ranch assets have increased by $3 million to total $3.3 million. Should each sibling receive $1.1 million? Goeller suggests tailoring the estate plan to compensate Jimmy for his contribution to the ranch’s growth. In this case, the parents decide he was responsible for 50 percent of the ranch’s growth since 1990, with the parents responsible for the other half.

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