Dec 16, 2011Set yourself up for succession success
About a decade ago, Russell Costanza’s son and daughter both decided they wanted to inherit the family farm. Their decision spurred Costanza to do something he’d been thinking about for years but hadn’t gotten around to: Come up with a farm succession plan.
Here’s the family situation: Costanza, now 65, and his wife, Janice, own Russell Costanza Farms in Sodus, Mich. Their two children, Lisa and Todd, are both in their early 30s. Todd has two kids, with another on the way. Lisa’s husband, Ron Hauch, has been working at Costanza Farms since he was a boy, and will be an equal partner in the farm inheritance, Costanza said.
Costanza grew up on his father’s Sodus-area vegetable farm. By the time he was in his 20s, he knew farming was a tough way to make a living, so he worked for an engineering firm for about a dozen years. When the jobs dried up in the early 1980s, however, he went back to farming full-time. He had been farming part-time since 1974, when he bought 10 acres “nobody else wanted.”
Costanza now farms more than 500 acres, which include fresh-market cucumbers, summer squash, tomatoes, eggplant and peppers, he said.
When it came time to develop a business succession plan, Costanza didn’t have much experience. When his father had died, the family farm’s remaining acres were sold and the proceeds split between Costanza and his two brothers.
Costanza got some good guidance from Michigan State University (MSU), however, and learned there are a number of ways to transfer an estate. His overall goal is to gradually transfer the farm to his two kids and son-in-law with as little tax penalty as possible. It’s been a long, complicated process, and it will continue until Costanza is gone – since he doesn’t plan on retiring.
It can also an expensive process, especially when lawyers get involved, he said. Still, picking the right estate planning attorney is an important decision. A good tax attorney is invaluable, too, he said.
Then again, if you want things to get really expensive, don’t come up with a transfer plan at all, Costanza said. He figures that for every dollar he spends on estate planning today, his kids will save $100 in estate taxes in the future.
As part of the transfer process, his children already own some farm land and make their own decisions about what to do with it – decisions Costanza doesn’t always agree with. But in the long run, that’s a good thing. If the kids are going to be fully engaged in the transfer process, they need a sense of ownership, a sense of responsibility – including the chance to make their own mistakes. Too often with farm families, the previous generation doesn’t want to let go, he said.
“There’s a time to speak up and a time to shut up,” Costanza said. “If you don’t let them make decisions, they aren’t into it 100 percent.”
Make a plan
Roger Betz, a farm management educator with MSU Extension, talked to growers about business succession and estate plans during a Nov. 10 workshop in Grand Rapids, Mich. He said good succession plans should provide an orderly transfer of assets, preserve the value of those assets, ensure the financial independence of the current owners while providing opportunity for the heirs, and minimize income and estate taxes.
Betz broke business succession planning into three main categories: management, ownership and taxes.
“It’s important to realize that management and ownership are not necessarily one and the same,” according to Betz’s presentation. “You may decide, for instance, to transfer management of your business to just one of your children but transfer equal shares of business ownership to all your children, whether they’re actively involved in operating the business or not.”
Sometimes, the farming heirs need all of the farm assets in order to survive, which might leave the non-farming heirs out in the cold. One way to solve that problem is to give the non-farming heirs a chunk of the farm’s future profits. That way they’d still get an inheritance, even if it’s a long-term inheritance, said Ben Fowler, an estate planning attorney with McShane & Bowie in Grand Rapids.
Betz, 55, gave an example from his own experience: When his father died in 1983, Betz got 100 acres and $15,000 for a down payment on a house. His older brother got everything else: 250 acres (plus a deal to buy 200 more from his mother) and all of the farm machinery, crop inventory and livestock.
Obviously, that wasn’t an equal bequest, but put in its proper context it was fair. At the time, Betz had no children, a college education and he’d already started working for MSU Extension, he said. His brother, Tom, meanwhile, had always been more involved on the family farm. Tom’s wife and one of his sons had died by the time he inherited the farm, and he had other children to take care of. He needed the farm more than his younger brother.
“It’s what needed to be done for everybody to survive,” Betz said.
According to Betz, more than 70 percent of family owned businesses do not survive the transition from founder to second generation. In most cases, the “killer” is taxes or family discord – both issues that can be covered by a good succession plan, he said.
For more information about business succession plans in Michigan, call Betz at 269-781-0784, or email firstname.lastname@example.org. Or, call Fowler at 616-732-5000.