As mentioned in my previous post my family spent a couple of years working through how we wanted to transfer the farm from a management and personal perspective. Now we were ready to move on to the actual financial and legal mechanics of the farm transfer.
To start this process we met with our team; attorney, lender, and tax accountant. My dad's original thought was that the two of us boys would buy the dairy portion of the business from him, including the 30 acre site that contains the building site, all of the cattle, lactating and non, and finally all of the equipment. This would allow him to eliminate debt but maintain personal wealth and allow Will and to run the farm. This seemed like a fair and simple process until our accountant figured out the tax implication of this type of transfer. It would suffice to say Uncle Sam would end up with the largest portion of the farm!! At this point we had to look for ways that would allow Will and I to take over the farm but limit the tax liability on either party. What we ended up with is a fairly complicated plan, but it seems to be working.
The first portion of this plan was to create a new LLC, in which three of us, Will, my dad, and myself were equal owners. This new entity purchased equipment and facilities, including 30 acres, from my parents through assumption of debt, creating a net zero company. Then it gets complicated!! The LLC purchased all open cattle from my parents, (actually the S-corp they owned, which in turned owned all the cattle) while my parents kept all milking and pregnant cattle. The LLC also has a purchase agreement to buy all heifer calves that are born to cattle owned by the original corporation. This results in the s-corp slowly losing value until it reaches zero due to the maturation and culling of cows.
Since the LLC now owns the facilities, but initially had no income, income was and still is generated through rental agreements. The corp leases the dairy facilities from the LLC and pays a fee to the LLC for feeding and milking cattle. These leases are all designed for maximum flexibility to allow changing in amounts and terms to help balance cash flow between entities. Also as the LLC begins to have lactating cattle the milk check then becomes split proportionally to cattle numbers, further requiring adjustments and cancellation of lease agreements between parties.
Throughout all of this my parents kept the land base, therefore keeping their net worth, as well as guaranteeing retirement income as this land is leased to the LLC. Future purchases of land will be done by my brother and I which will then allow us to start generating personal net worth.
There are two more items of note, my dad is intended only to be a member of the LLC for short term tax benefits, 2-4 years, then the plan is for him to divest out of the LLC before it starts gaining net worth. The final thing that was set up was a will that handles disbursement of land and non Ag assets upon the death of my parents, however since this is pretty state specific so I will not be further discussing that, it is a conversation to have with your attorney.
As you can see a farm transfer can become quite convoluted which is why it is vitally important for there to be good communication between generations as well as a good support team in place to push it through. Looking forward to posting one more section on post paperwork maintenance of the transfer.