Preparing to Become the Next Generation

Report
Preparing to Become
the Next Generation
Presented by:
William E. Roberts, CLU, ChFC
AUCTORIS
May 14, 2014
Farm and Ranch Statistics
USDA 1999 Agricultural Economics and Land
Ownership Survey revealed:
• Close to 50% of farm and ranch owners were
65 or older
USDA 2010 economic survey revealed:
• Most farm and ranches are family owned
• 88 percent of all farm assets were illiquid
• 70% of the nation’s farms and ranches will
change hands in the next two decades
• 89% of farmers and ranchers do not have a
transition plan
2
Recent Family Business Study
Of 500 Family Businesses surveyed:
•
50% plan ownership transition by 2016
•
70% have no written transition plan
3
Six Issues in Ag Family Transition
Planning
1. Relationship issues
a.
b.
c.
d.
Intransigent senior generation
Siblings conflict
Siblings spouses
Multiple marriages resulting in non-blood line
next generation heirs
e. Mixing business and personal expenses
2. The Numbers
a. Three siblings beget eight children ….how to
divide 8 ways
4
Six Issues in Ag Family Transition
Planning
3. Operating siblings in conflict with nonoperators
4. The potential of an estate tax
a. Creates a liquidity crisis
b. Forced sale of illiquid farm or ranch assets
5. Planning documents
a. Don’t exist
b. Out of date
c. Values out of date
6. Heirs not prepared for what they will inherit
5
FAMILY
BUSINESS
6
Research on Wealth Transition
Based on two studies of The Williams
Group.
Study #1 – Interviews by The
Williams Group of 2,500 families
who had transferred wealth, were in
the process or had done nothing.
Research confirmed 70% failure rate
and identified causes of the failures,
even among families who only owned
investable assets.
Study #2 – Research on 750 families
conducted by The Williams Group
and Michael Morris at the Family
Business Institute at the University of
Oklahoma. Research supported the
70% failure and the causes of the
failures.
Conclusion – Whether a family owns
a operating business or is in the
business of managing its assets, the
failure rate is the same.
7
How is Most Transition
Planning Created?
• It is often ignored
• Focused on Estate Planning
• Estate taxes are a primary driver of
planning
8
Critical Ingredient for
Transition Success
99
Competent Successors
10
Without Competent Successors,
there is no Succession Plan
• What does the next generation want to do?
– They need to do it well
– May need lots of mentoring
• Need to create or develop competent
leadership
• Non-family ranch manager
11
Ag Family Business
Case Study
12
Case Facts
A. Neuberger Family-Owned Ranch
B. Location in Eagleford Shale area of
south central Texas
C. 1200-1500 head of cattle (amount varies
with drought and feed availability)
D. >50,000 acres
E. The ranch owned by the family for
several generations
13
Business Operations
A. All assets – land, cattle, and mineral
rights – owned in The Neuberger Family
Ranch Corporation, a C-Corporation
B. Neuberger Ranch Corporation is owned
equally by the three siblings (G-3)
currently living on the ranch
14
Family Situation
A. Parents are deceased, but left the ranch with
considerable debt
B. Bob Neuberger (oldest operating sibling) age 53,
married to Evelyn
1.
2.
3.
Cal – age 24
Evan – age 22
Ellen – age 20
C. Billy – second oldest – age 51 and married to Lauren
1.
2.
Darren – age 20
Sarah – age 18
D. Kevin – youngest brother – age 45, married to Jean
1.
2.
Debbie – age 15
Robert – age 12
15
Family Assets
Mineral rights:
• Oil and gas fracking results in between
$120-150K cash flow per month
• Being used to pay down debt
• Debt reduced from over $5M to less than
$1M today
• Cash flow could last 15-20 years
16
Family Assets
• Total value of the ranch, land, cattle,
equipment and mineral rights cash flow
exceeds $35M.
• There is a last man standing mandatory
buy-sell agreement in affect for the
interests of the 3 siblings but it is perceived
to be out of date and buy out is for $5M per
sibling.
17
What are the
challenges?
18
Family Conflict Issues
“Relationship issues are the biggest liability a family business faces”.
-Joe Paul, Partner, Aspen Family Business Group
• Family has volatile interpersonal issues
• Jealousy over money spent on one sibling’s
house versus another’s
• Compensation issues….equal is not
equitable
• One sibling is “the boss”
• In-laws feelings hurt
19
Family Ownership Issues
• Major family value is to retain the land
within the family to honor their parents’ and
grandparents’ wishes
• Two of the seven next generation (G-4),
Cal & Ellen are interested in operating the
ranch into the next generation
20
Summary of Challenges
1. The simmering conflict between the
families has been keeping them from
addressing their ranch succession
planning
2. Buy-Sell Agreement is out of date,
underfunded, and does not match current
objectives
3. All the assets are owned by the operating
C-Corporation
21
Summary of Challenges
4. Two of the seven G-4’s interested in
operating the ranch … likely minority
ownership
5. Potential estate tax issues could force a
sale
6. Estate plans are out of date and are not
taking advantage of opportunities to reduce
estate tax at G-3 demise
22
“Happiness is
having a large,
loving, caring,
close-knit
family …in
another State”.
– George
Burns
23
Succession
Strategies Application
24
Conflict and confrontation between
siblings and their family:
• Family agrees this is a major impediment
holding them back
• Family business consultant providing outside
input
• Intervention regarding an addiction issue
• Real breakthroughs in communication
• Had to be addressed simultaneously with the
estate and buy-sell planning
• Some of the issues may not be “solved”
25
Current Buy-Sell
Agreement
26
Buy-Sell Agreement
Insurance
Company
$5.0M
Death Benefit
Paid to C-Corp
as policy owner
Sale of Shares
C-Corp buys
shares from
Owner A's Estate
Owner A's
Estate
$5.0M
C-Corp
Stock
Owner B
Owner C
Stock Basis
Owner's B & C keep
their same basis since
C-Corp buys Owner A's
Shares
Stock Redemption Issues
1. Death Benefit paid to C-Corp may trigger AMT
2. No Increase in Basis to surviving owners
27
Challenges
Added Tax Cost
(20% rate)
Added ObamaCare Tax
Cost (3.8%)
28
Current Corporate
Ownership Issues
29
Current Corporate Structure
All Business Units Under One C-Corporation
Neuberger Ranch
C-Corp
Hunting
Rights
Operation
Ranch
Land
&
Cattle
Mineral
Equipment
Rights
30
Challenges
Ownership Structure Concerns
– Liability and creditor protection issues
– If the ranch is ever sold, very
unfavorable tax treatment accorded a
sale of assets owned by the C-Corp
– Makes planning for the passage to the
next generation very cumbersome
31
Challenges
Next Generation Objectives not in alignment
2 will stay on ranch while the other 5 are likely to
leave
– Challenges to family harmony and business
success if operating and non-operating children
have equal say and vote.
– Differing objectives of operating and nonoperating children
– Very difficult to divide the assets of the ranch
without huge tax impact
– Could result in family conflict and disharmony in
the next generation
32
Solutions?
33
5 Alternative Strategies
•
•
Do nothing & stay together
Divide ranch, mineral rights, and debt into 1/3
interests
One sibling buys out the other two and continues
operation
Sell out and divide assets
Stay together
•
•
•
–
–
–
–
–
–
Attempt to work on differences
Change C-Corp to an S-Corp; Recap from voting to non-voting
stock
Develop a fair compensation plan
Allocate home improvement budget
View mineral cash flow as an “ownership asset”
Work on transition plan to G-4’s interested in operation
34
C-Corp to S-Corp
Neuberger Ranch
C-Corporation
10%
Voting Stock
Neuberger Ranch
S-Corporation
90%
Non-Voting Stock
35
Buy-Sell Design
36
Buy-Sell Agreements
1. Purpose of a buy-sell agreement
– Create a plan that defines control,
value and dispensation of the stock
under defined triggering events
37
Buy-Sell Agreements
2. Major components of a buy-sell agreement
– Triggering Events
• Death
• Disability
• Termination of participation
• Divorce
• Sale of the entity
– Valuation for different triggering events
– Funding for triggering events
38
Estate Tax Issues
39
Wealth Transfer Projection - Bob & Evelyn Neuberger
Growth / Tax
Taxable Estate
Wealth Transfer
Bob & Evelyn
At Bob & Evelyn's Death
7%
Neuberger
Yr Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2027
2032
2037
2042
2046
2047
45%
Taxable
Lifetime
Estate
Net to
% Wealth
Ranch1
Debt1
Estate
Exemption
Tax
Heirs
Lost
1
2
3
4
5
6
7
(3 - 4) * Tax%
3 -5
5/3
75,000
348,000
634,335
935,033
1,251,196
1,594,504
1,966,958
2,370,701
2,808,027
3,281,394
6,287,734
10,679,700
17,033,336
26,158,475
36,204,595
39,193,043
10,591,667
11,135,333
11,699,498
12,285,502
12,894,777
13,541,687
14,228,766
14,958,723
15,734,457
16,559,064
21,539,535
28,349,484
37,707,113
50,617,838
64,433,490
68,489,707
$35M / 3 kids
1
2
3
4
5
6
7
8
9
10
15
20
25
30
34
35
2%
11,666,667
12,150,000
12,667,167
13,220,535
14,145,972
15,136,191
16,195,724
17,329,425
18,542,484
19,840,458
27,827,269
39,029,184
54,740,450
76,776,313
100,638,084
107,682,750
1-2
1,000,000
666,667
333,333
10,666,667
11,483,333
12,333,833
13,220,535
14,145,972
15,136,191
16,195,724
17,329,425
18,542,484
19,840,458
27,827,269
39,029,184
54,740,450
76,776,313
100,638,084
107,682,750
10,500,000
10,710,000
10,924,200
11,142,684
11,365,538
11,592,848
11,824,705
12,061,200
12,302,424
12,548,472
13,854,527
15,296,517
16,888,591
18,646,369
20,183,430
20,587,098
0.7%
3.0%
5.1%
7.1%
8.8%
10.5%
12.1%
13.7%
15.1%
16.5%
22.6%
27.4%
31.1%
34.1%
36.0%
36.4% 40
Transition Issues
How is the estate tax funded??
Taxes
Family
41
Estate Issues
Issues to be considered
•Should some of the growth be transferred
to the next generation now?
• How will any interest transferred be held?
• Buy-sell agreements to control where
those interests go in event of a triggering
event
42
Gifting Considerations
1. If stock is gifted or sold to
NexGen, who or what should be
the owner?
– Outright ownership
• Concern: Spousal rights
– A trust for the benefit of G4
43
Gifting Considerations
2. Estate planning considerations
for NexGen’s?
– Possible estate taxation
– Will stock stay in the bloodline,
be sold back to other
NexGen’s or passed to
spouse?
44
Estate Issues
A Plan to Pay the Estate
Tax
– Section 6166
– Life Insurance
– A combination
45
Estate Issues
Irrevocable life insurance trust
– Keeps insurance out of the estate
– Provides liquidity when needed
– Can be funded with income
producing gifts
– Premium financing
46
“The definition of crazy and impossible is
doing the same thing over and over again
and expecting different results!”
- Albert Einstein
47
Lessons Learned from Neuberger
Case
1. Important to seek outside specialist to deal with
relationship issues
a. “Relationship issues are the biggest liability a family
business faces”
2. Transition planning requires a team of advisors
3. Next generation succession planning is more complicated
due to the number of successors
4. Outdated documents can be contentious
5. The estate tax liability can complicate the best of plans
6. The next generation is often frustrated by their parents
issues and lack of a plan
48
Shirtsleeves to Shirtsleeves?
49
Risk Perception
Why do 90% Fail?
• 60% of failure is due to a lack of
communication and trust within the family
around group decision making and
governance
• 25% of failure is due to unprepared heirs
• Only 3% of failure is due to failures in
financial planning, taxes and investments
50
What is Success?
Health
y
United
Family
High Self Esteem
Building Trust,
Communication & Team
Through “Meaningful
Experiences”
Manage
& Use
Wealth
Wisely
All Leading to – Healthy Family Group
Governance; Able to Manage Entities
and Trust Structures
51
What is Failure?
Unhealthy
Divided
Family
Low Self Esteem
Entitled Individuals
Wealth
Used
Inefficientl
y & Wasted
All Leading to – Unhealthy Divided
Governance
52
Rating your Family’s Preparation
Wealth Transition Checklist
53
54
William E. Roberts, CLU, ChFC
Co-Founder/Principal
5350 S. Roslyn Street, Suite 310
Greenwood Village, CO 80111
Office: 303.740.8001
Fax: 303.220.9545
William.Roberts@auctoris.com
www.AUCTORIS.com
55

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