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What Should I Do?

What Should I Do?. Jesse J. Richardson, Jr. Associate Professor Urban Affairs and Planning Virginia Tech Blacksburg, Virginia 24061-0113 jessej@vt.edu Farm Business Succession and Estate Planning Pre-conference Session National Risk Management Education Conference April 16, 2006

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What Should I Do?

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  1. What Should I Do? Jesse J. Richardson, Jr. Associate Professor Urban Affairs and Planning Virginia Tech Blacksburg, Virginia 24061-0113 jessej@vt.edu Farm Business Succession and Estate Planning Pre-conference Session National Risk Management Education Conference April 16, 2006 Phoenix, Arizona

  2. Too Many Choices! • Limited Liability Company or Corporation? • Living trust? • Gifting or leave at death?

  3. Estate Taxes Should not Drive the Plan! • Estate taxes have never been the issue • 2.2% of estates pay estate taxes • 5% of that 2% have farm assets (.11% of estates)

  4. “What’s the goal?” should precede “What’s the solution?” • The answer to all of the questions is “IT DEPENDS”! • Depends on: • values • goals • family dynamics • more • None of these tools are magic! • Don’t put the cart before the horse!

  5. Working with the Attorney and other Professionals • If you convey your goals to the attorney, CPA or other professional, they can review the appropriate tools to achieve the goal • The legal and tax aspects are the easy part • The family dynamics and COMMUNICATION are the hard part • There is no crying in law school

  6. Beware the Boilerplate! • Most attorneys are like mechanics • If you do not ask otherwise, you will get a boilerplate • Boilerplates are not tailored for your family! • Demand the tailored approach!

  7. Substance over Form • Business organization is not as important as business agreements • Buy-Sell • Restrictions on transfers • Termination • Protection from divorce • Disability

  8. 5 D’s of Business Agreements • Death • Disability • Disagreements • Divorce • Disaster

  9. Buy Out 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?

  10. 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 • Installment sales provisions

  11. Alternative Restriction on Transfer 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.

  12. Separate 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

  13. Conclusions • Anticipate the unexpected • Plan for the worst-case scenario • Cover all your bases • Tailor the business documents to the family • COMMUNICATE • PLAN

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