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The Estate Planning Conversation
By Kevin Spafford, CFP®
Founder - Legacy by Design, LLC
Recently, a student with the Food Law and Policy Clinic at Harvard Law School contacted me for some helpful hints on succession planning. He’s producing a guidebook for pro bono lawyers working with farmers. The guide introduces lawyers to the unique concerns that farmers face when confronting legal issues in estate and succession planning. Though his focus is farmers, my input applies to equipment dealers and other family business owners.
The number one concern, though rarely---if ever---acknowledged by an attorney, is that most typical estate planning techniques divide an ‘estate’ among all of a person’s heirs to mitigate the estate tax. Recognizing this is an oversimplification, when the estate is comprised of assets other than a farm or family business, this technique may be effective.
However, when the primary asset is a farm or family-owned business, this technique essentially divides the farm/land among active and inactive family members, people who have dissimilar [read: opposing] objectives, effectively pitting each against the other in a tug-of-war of value. The farming relatives will want to maintain the operation and keep the whole intact. On the other hand, inactive family members may prefer to sell the property and then invest their inheritance in others assets.
On the whiteboard, this may sound like an acceptable scenario; except most farmers are cash-poor and purchasing large shares of real estate from the inactive family members can be a significant---if not insurmountable---obligation, especially when the triggering event is the sudden and unexpected death of a loved one.
It will be much more effective to devise planning methods that maintain the integrity of the operation and still provide equitable distributions to a person’s inactive/off-farm heirs. Using planning methods that separate the farming operation and land holdings into separate legal entities is a simple, yet effective start. An attorney can then help the family develop complete operating agreements and negotiate appropriate buy/sell provisions.
An estate plan is triggered by death. Succession is about transitioning the operation as a going-concern to a well-prepared next generation during life. So, a complete and comprehensive plan should contain four parts:
- Ownership Transition – during life, and in most cases, gradually over a specified period of time.
- Leadership Development – not only preparing the next owner[s] for a leadership role, but also structuring the entities to be managed effectively i.e.: appropriately drafted operating agreements, etc.
- Financial Security – including asset accumulations beyond the farm property and programs for debt reduction/capital management.
- Estate Tax Provisions – mitigate the estate tax while maintaining the integrity of the operation and planning for contingencies, including death/disability/special needs.
2. How can an attorney structure the initial estate planning conversation and what are some of the key strategies for structuring the conversation?
Due to ethical concerns and ‘conflict of interest,’ an attorney is not at liberty to openly and objectively conduct a family meeting and represent multiple parties. It will help all concerned to have the attorney respectfully bow out until it’s time to discuss the legal options and the ramifications of optional planning method[s]. An attorney and legal matters are always part of the process. However, planning for the family requires a facilitator who can give ‘voice’ to the operation, speak from various perspectives, and delineate conflicting interests.
I strongly recommend that initial conversations include the entire family, active, inactive, in-laws, etc. Beyond improved communication it enhances the understanding and most importantly it allows each person to hear the conversation firsthand.
3. Are there legal strategies for overcoming the estate planning concerns identified in the first question above?
Proper succession planning is the only strategy that overcomes the ‘divide/destroy’ and ‘conflict of interest’ concerns mentioned above. The solution to both these issues is a moral obligation to clearly communicate to the client (potential client) that the attorney is ethically constrained by conflicts of interest from objectively conducting the family meeting.
Legal counsel should be focused on techniques to mitigate the estate tax and maintain the integrity of the family farm. An attorney should be well-versed in business management to best advise the provisions necessary for an operating agreement. A well-designed and appropriately written buy/sell agreement can be the most valuable document in an attorney’s arsenal.
However, most buy/sell agreements are cursory at best. A properly designed legal document will specify ‘reasonable’ terms and conditions (that will not jeopardize the farming operation), provide a first-right of refusal, and expanded triggering events---dissolutions, etc. The buy/sell agreement should be employed to better maintain the integrity of operation and ensure family harmony.
A good attorney will explain that legal tools/techniques can be used to mitigate the estate tax only after the family has engaged a planning expert who can openly and objectively address the comprehensive succession needs for the operation.
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