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Linking Programs

John R. BakerAttorney at Law

Beginning Farmer CenterIFTN Chairman

IN THE BEGINNING

• The Farm Debt Crisis of the 1980’s— Result is that we have twice as many farmers

over the age of 65 years old as are under the age of 35.

• Difficulty to enter farming due to — Rising Farm Land Prices— Inability to Identify Entry Opportunities— Lack of Professional Advice and Advisors— Lack of Adequate Preparation

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• A Generation That Wanted To Be Farmers• Growth of Sustainable Agriculture

— Sustain the Environment— Sustain the Family — Sustain the Community— Capable of Generational Transition

• Growth of By Fresh/By Local• Growth of Farmers Markets• Growth of Farm Land Preservation Efforts• Slow Foods Movement• The Response To The Challenges/Opportunities

LINKING PROGRAMS• What is Needed to Create a Link Program?

— An Organization to Administer the Program— Farmers and Land Owners — Qualified Beginning Farmers

• What is Needed to Maintain a Link Program?— Stable Long Term Funding— Clear Vision, Mission and Goals— Clear Definition of Success— Accurate Records and Evaluation

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LINKING PROGRAMS• What Does a Linking Program Need To Do?

— Marketing & Marketing & Marketing & Marketing………..

— Targeted Research — Develop Research Based Educational Materials— Educational Outreach— Train Farm Succession Coordinators— Referral to Qualified Consultants

The Beginning Farmer Center

Ag Link matching programReturning to the Farm SeminarBusiness Transition SeminarConsultationsResearchInformation and ReferralRecommendations to the legislature

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What Do We Really Know About Farm Business Succession Planning?

What does the research tell us?

FARMTRANSFERS

• An international collaboration initiated by Professor Andrew Errington (deceased), The University of Plymouth, England and John R. Baker, Beginning Farmer Center, Iowa State University.

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FARMTRANSFERS

Approximately 17,000 farmers have completed the FARMTRANSFERS questionnaire. Data is collected through a postal questionnaire covering basic background information about the farm (e.g., size, tenure, and enterprise structure) and farm family demographics (e.g., age and household composition).

FARMTRANSFERS

Detailed information is also recorded regarding retirement plans, succession plans, estate plans, sources of advice, sources of information, and the delegation of decision making responsibility between the principal farmer and his or her successor(s).

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Research Objectives• Confirm the elements of farm succession plans• Establish whether or not an identifiable career

ladder in farm business successions exists• Determine the educational needs of farm

business owners• Compare the patterns of succession between

countries and years• Create a data archive that is available for

research collaborations

FARMTRANSFERS Surveys Conducted1991–2010

1991 England1993 France1997 Ontario &

Quebec1997 England2000 Iowa2001 Japan2001 Virginia2003 Germany

2003 Poland2003 Switzerland2003 Austria2004 California

(Humboldt Co.)2004 Australia2005 Pennsylvania

& New Jersey2005 N. Carolina

2006 Iowa2006 Wisconsin2009 Romania2010 Tennessee2012 New Zealand (pending)

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Iowa

• In 2006 a mail survey was sent to 2,847 farmers throughout Iowa. There were 972 responses returned (34 percent).

• In 2000 1,548 surveys were mailed with 418 responses (27 percent).

Iowa: 2000 and 2006

YEAR 2002 2006Average age of operator 54.3 56 Farming is principal occupation 68% 54%Average size of farms (acres) 350 446

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Percent of Farmers Who Have Identified a Successor

Identification of Successor

27%

73%

Yes No

Age Distribution of SuccessorsAge of Successor

0%

5%

10%

15%

20%

25%

30%

35%

<20 20-29 30-39 40-49 50-59 60-69 70-79

Successor’s Average Age Is 34

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DefinitionsInheritance

The transfer of land and other farm business assets to a succeeding generation upon the death of the owner of those assets.

SuccessionThe transfer of managerial control of the farm business to the succeeding generation during the life of the owner of the business.

RetirementThe withdrawal of labor to and managerial control of the business by the owner.

Retirement

0% 10% 20% 30% 40% 50%

Never Retire

Semi Retire

Will Retire

2006 2000

Anticipated Retirement Plans

Retire: The withdrawal of all labor and management .Semi-Retire: The withdrawal of some labor and some management.Never Retire: Contributing historical labor and management.

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Retirement/Semi-Retirement Age

Age of Retirement

0% 10% 20% 30% 40% 50% 60% 70%

<50

50-59

60-69

70-79

80-89

90+

The average age of retirement/semi-retirement is 67 years old

International Retirement Comparison

0

20

40

60

80

Will Retire Semi Retire Never Retire

Will Retire 31.9 33.7 64.7 33.8 37.2 23.9 18.5 18 24 24 27 30.5

Semi Retire 56 53.4 28.9 44 49.5 33.9 37.5 35 29 29 38 46.5

Never Retire 11 12.9 6.4 22.1 13.3 42.1 44.5 47 40 40 35 23

Australia England France Ontario Quebec Virginia Japan N. CarolinaNew

JerseyPenn. Iowa 2000 Iowa 2006

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Source of Retirement InformationRetirement Discussion

0% 10% 20% 30% 40% 50% 60%

Other

No one

Consultant

Banker

Accountant

Lawyer

Family

2006 2000

Percent of Anticipated Retirement Income by Source

0%

5%

10%

15%

20%

25%

Land Sale LivestockSale

Asset Sale OtherProperty

Sale

Existing farm SocialSecurity

RetirementPlan

Investments Other

Semi retire Fully retire

Sources Anticipated Retirement Income

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Anticipated Method for Transfering Iowa Farmland

0

5

10

15

20

25

30

35

40

Will tofamily

Will toother

Give tofamily

Give toothers

Sell tofamily

Sell toothers

Put intrust

Other DK

Perc

ent o

f Farm

land

Farmers Responses to Best Plan for an Estate Plan

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Sell Put it inTrust/

Corporation

Dividebetween all

heirs equally

Give/Sell toSuccessor

No Plans Give to 1Heir

Misc/ Keepland in 1

piece

Dividebetween all

heirs w/farming

heirs gettingland or more

than rest

Give tosomeoneother than

familymember

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Rank order of managerial authority retained by the owner/operator

Decision Iowa2006

Australia2004

Virginia2001

Japan2001

Ontario1997

Quebec1997

England1997

Decides when to pay bills 1 1 1 2 1 1 1Identify sources & negotiate loans & finances

2 2 2 1 2 2 2Negotiate sales of crops/ livestock

3 7= 4 6= 3 3 3

Decide when to sell corps/ livestock

4 6 5= 6= 4 5 4

Level of inputs used

5 8 3 5 11 6 13

Rank order of managerial authority retained by the owner/operator

Decision Iowa2006

Australia2004

Virginia2001

Japan2001

Ontario1997

Quebec1997

England1997

Decide & plan capital projects

6 4 7 9 5 8 5

Negotiate purchase of machines & equipment

7 5 8 12 6 9 8

Plan day-to-day work

8 9 12 3 12 11 9

Decide work method/way jobs are done

9 12 13 10 13 13 12

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Rank order of managerial authority retained by the owner/operator

Decision Iowa2006

Australia2004

Virginia2001

Japan2001

Ontario1997

Quebec1997

England1997

Decide long term balance & type of enterprises

10= 3 5= 11 7 10 6

Decide timing of operations activities

10= 10 10= 8 9 7 10

Decide type & make of machines and equipment

10= 11 10= 13 10 12 11

Make annual crop/livestock plans

11 7= 9 4 8 4 7

What’s It Worth If You Stay On The Farm?

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“I’ve spent my entire life paying off my uncles.

Now I’ll spend the rest of my life paying off my brothers.”

English farmer, Devon, UK 2002

QUESTIONS• How many times does one family have to

buy the farm?

• What does the recapitalization every generation do to the future of the business?

• What does the that do to the family?

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Dad and Mom have asked Sarah to come back and eventually take over the farm family business. They have offered Sarah an annual salary of $52,000 per year.Sarah has one sister and two brothers. None are interested in taking over the farm family business. Dad and Mom have always said that they will treat all their children equally.

Mom and Dad have told Sarah that she will receive $250 per week and that each of her sibling will receive $250.Sarah, her sister and her brothers have been treated equally.Does this sound fair?If it is not fair during the life of the owner then what makes an equal division fair after the death of the owner?

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KEY CONCEPT

Compensation = Contribution

Basics for compensation of the On-Farm Heir?

•Time•Market price of labor•Value Added to Farm•Preserved wealth

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Case Study

The Miller family is a typical Iowa family who own and operate a farm family business and they want it to continue for another generation. Only one of their children is interested in farming.

The Miller’s• Denny and Mary: Farmers in Smallville,

IA.• Denny farms with his father, Tom.• 3 children: Chris, Kevin and Kathy.

– Only Kevin wants to farm.

• Mary and Denny love all their children and wonder how to divide assets when they are gone.

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The Miller’s: Part One

• Kevin is 21 and has a cattle herd of 10.• He is in college and will finish this year.• Since he hasn’t contributed to the farm, no

compensation is needed• Equal division would be fair because

Kevin hasn’t done anything “extra.”

The Miller’s: Part Two• Mary and Denny are 65.• Kevin is 41 and is married to Grace w/ 3 children: .• Denny and Kevin have been farming together for 20

years.• Kevin makes some management decisions.• 2,000 acres are farmed by Denny and Kevin.• Their herds have grown significantly.• How do we value Kevin’s contribution to the

farm?

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Factors to Consider1. What value has Kevin added to the farm?2. What value has Denny added because he

knows Kevin is going to take over?3. Has Kevin built assets on Denny’s land?4. What amount should Kevin receive for

management decisions?5. Has Kevin made repairs, improvements to

property?

The Miller’s: Part Three• Denny’s dad, Tom, passes away.• Denny is having back problems and finds it hard to ride

tractor.• Kevin’s daughter, Jessica, and her husband want to come

back and farm.• Half of cash leases have been transferred to Kevin’s name.• Kevin has taken over the hay operation and all

management tasks.• Denny is slowly phasing out of the business.• How do we value Kevin’s contribution to the farm?

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Factors to Consider:• The value has Kevin added to the farm.• Kevin’s assets that are on Denny’s property.• The physical work does Kevin do on Denny’s land.• Compensation for Kevin being the farm as manager for

Denny and Mary.• Compensation for record keeping.• Wealth preserved because of Kevin’s presence. (i.e. living

in a farm house that would have deteriorated)?• Personal services performed by Kevin and Grace

The Miller’s: Stage Four• Denny dies; Mary’s health declines rapidly• Kevin and Grace help her w/ almost everything; i.e.

chores, doctor visits, cooking meals, laundry, etc.• Cows are gone; Kevin uses buildings, shop, grain bins, etc.

on farm• Kevin received all Denny’s machinery.• Mary now owns the entire land because her and Denny

had a joint tenancy.

• How do we value Kevin and Grace’s extra work on the farm and caring for Mary?

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Factors to Consider• Would the farm business still exist without

Kevin?• Would Mary be in a nursing home if Grace and

Kevin didn’t care for her?• Are Kevin and Grace receiving other benefits by

staying on the farm?• How much value has Kevin added to the farm?• Is Kevin the managing the entire business?• Increased profits due to Kevin’s management?

Now, how do we value?

• There is no exact formula to do this!• However, we can place values on services and

increase in wealth/value/etc. • Once values have been determined, we can

multiply this by the number of years worked by Kevin.

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On Farm Heir's Share from

Distribution page

Each off Farm Heir's share from Distribution page

Number of Heirs

Value* /hour

Hrs./ Week

Weeks/ Year Yearly Value

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Total Net Worth

Personal Care $ 1,253,562.47 $ 788,250.77 $ 2,830,064.00 Cooking $10.31 5 50 $ 2,577.50 Cleaning (Washing dishes, vaccuuming, dusting, cleaning bathroom) $ 9.20 3 50 $ 1,380.00

Assume the On Farm Heir is also the primary caregiver

Laundry $ 9.75 3 26 $ 760.50 Bathing, dressing, grooming $10.00 $ - 3 Year Care AdjustmentTransportation to Doctor, for Groceries, etc. $10.20 2 52 $ 1,060.80 Caregiver/Farmer Other HeirsPick up and delivery of pills and other supplies $10.00 0.5 52 $ 260.00 $ 1,306,685.93 $ 761,689.04 Other $ -Other $ - 5 Year Care Adjustment

Total Personal Care $ 6,038.80 Caregiver/Farmer Other Heirs

$ - $ 1,347,413.91 $ 741,325.04 Farm Maintenance $ -

Farm Management $27.93 5 52 $ 7,261.80 7 Year Care Adjustment

Personal Financial Advisor $36.73 0.5 26 $ 477.49 Caregiver/Farmer Other Heirs

Bookkeeping $14.37 0.5 26 $ 186.81 $ 1,384,954.49 $ 722,554.75 Farm Labor $11.70 5 50 $ 2,925.00 Mechanics $15.11 $ - 10 Year Care AdjustmentLawn Mowing, Snow removal and Groundskeeping $11.36 3 24 $ 817.92 Caregiver/Farmer Other Heirs

Other $ - $ 1,441,265.36 $ 694,399.32 Other $ -

Total Farm Maintenance $ 11,669.02

TOTAL $ 17,707.82

Equitable Division of Property

• Equal is not always fair.• An equitable division allows the On-Farm Heir

to be compensated for the increase in the wealth they have created and protected.

• An equitable division also gives the On-Farm heir a greater chance of being able to maintain the farm family business.

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Presented by:

John R. BakerAttorney at Law

jrbaker@iastate.edu1-800-447-1985