operating partnership, family satisfaction, gross estate, income security, social security, interest payment, shares of stock, extension farm management, Real Estate, rent, operational side, income flow, social security benefits, estate settlement costs, principle and interest, Parents and children, operational partnership
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TIlE PARI! BU!!INESS FUTURE - ACCORDING TO WHQK 1/
Partners, Part Owners or Peons: that is what the 80n may be thinking. At
the same time, his folks may be thinking: Retire, Rent, Sell, Give, Incorporate or What?
These kinds of private conversations could be taking place ····
Dad -Mother J we are past 60. Maybe we should give the home fann to our kids. 'Iha t way we could cut down on the inheritance tax
we "d have to pay.
It's been great breaking into
George -farming with Dad. The only
thing i8, lid like to make
changes, but Dad iso't too
keen on them..
Mother -Good idea. But what would we live on? When we go on social security
we'll get less than $200 a month. And that 1s a lot Ieae than we spend now. ~ ..And we got to be careful to not hurt anybody' s feelings. Mother -George and Jeanne sure have been good to us.
l!.lli. Would your Dad 8ell you the Jeanne -farm on easy terms? George -Maybe, but they I re probably worried about bow the other kids would look at it. Jeanne -We read about how land. prices keep going up. The longer we wait to buy, the 1IOre we will have to pay.
George -1 wonder if we ought to ask Dad and Mother 1Ј they have any idea about their future plans and how they affect us?parents and children
often have differing views about decisions affecting the
management. ownership and control of the farm. operation. Bach baa seemingly rational
reasons for the views they bold, but often the basis is emotions rather than ecoDOll.ics.
It looks like Dad made a good start in setting up a SO-SO operational partnership
when the boy was 30 years of age ~ but has not progressed much aince tben in the
Prepared bt John I. Hoore, Extension Bconoll.1st, larm Management, O.S.U., March, 1974. This paper outlines solutions proposed in an article entitled, "How 1 Made My Dad a Success aad K,.self Di··olutloned at 40 Years of Age. II Thanks to R. H. Baker, Associate Profe88or _!=ld R.. D. Duvick, Extension Economist, Fann Management. 05U.
-2- There could be many alternative solutions developed to help solve some of the problems mentioned in this article
. Your lawyer should be employed to legalize any approach used. Some of these are: 1. Sell the land Bnd buildings to the operating son and wife over the next twenty-five years or so with the present operating partnership continuing except that the partnership would rent the Real Estate
from the son instead of from Dad until the age Dad wants to move clear out of management and labor. 2. Sell real estate and chattels to operating 80n and wife over twenty-five years or so. Employ Dad as consultant and for labor in critical labor peak seasons. Dad and mother could take full advantage of social security income plus interest Bnd principle payments. 3. Sell one-half of the real estate and the remaining one-half of the chattels. The new farm deed would be a Joint Deed in Common with Dad and Mother owning SO percent undivided interest and son and wife would give mortgage for 50 percent
undivided interest. 4. Incorporate the real estate and allow the present operating partnership to rent from the corporation. By sale and/or by gift. Dad could transfer both partnership and incorporation assets at a speed for the best interest of parents and children. In all the possible cases listed, we assume Dad and Mother would eithe~ be willing to build a new home on a separate surveyed area of the farm or in town or exchange living quarters with the son and wife. As an estate transfer method selling gives the parents opportunity to receive the principle and interest, then this leaves assets in a manageable or divisable form once the taxes have been paid and family living demands met. After current needs and contingency funds are met, the overage could be conveyed by gift to the son buying the farm, ocher cnildreQ or grandcb11dren as desired. Estate plann1ng includes the process of accumulating wealth in various forms (land, stocks, cash, insurance, etc.) aDd A Plan
to distribute the assets to best
-3- serve the needs and interest of the total family. Some people stress tax savings but income security for the parents 1s the primary objective and total family satisfaction is a close second. The methods listed on the previous page seem appropriate alternatives for the family to consider, however, there may be other more feasible ways of accomplishing your desired goals. It 1s difficult to go into all the ramifications at the four methods suggested. but following are some of the key factors of each method: 1. Sell Real Estate To Son and Continue the Present Operating Partnership. With farm land appreciating 8S it has for many years an installment purchase plan can be advantageous to both parents and operating son. 8. The son hedges the value of the real estate at a present day reasonable market value instead of having to buy the other relatives out twenty years or so later at a highly inflated price. This appreciated price could reflect added investments made in the real estate by the partnership or the son which results in higher estate settlement costs. b. The parents' gross estate would be the value of the unpaid balance in the land contract plus other assets they own at estate settlement time. c. Son and wife could start planning improvements in the home as well as on the farm within the capabilities of their Financial Resources
. d. Dad could stay active in the operating partnership reallzil:lg the amount of his labor and management draw would affect his ~octal security check but the income from principle and interest Will DOt disqualify t~ for social security benefits. e. Aft_r a .few years if dad decided to ease out of the operating PJrtaership, he could sell his half of the chattels to the Ion.
-4- f. Parents can use income from sale, wages, and social security for their income security, but beyond this need they can distribute some of it as gifts while they are living, hopefully, for more total family satisfaction. Gitt taxes are due above gift tax exemptions, but glft taxes are never more than 75 percent of federal estate taxes
. 2. Sell Real Estate Chattels (except machinery) to Operating Son and Wite. This would obligate the son to the maximum debt and responsibility. The longer the period of repayment, the better for the young folks and the longer the income flow would be forthcoming for dad and mother. When the death of the last parent happens, the son would probably refinance with a long-time credit source so the estate could be settled according to the desires of parents as stated in their "willrt · In tnis method. dad and mother1s income from principle and interest would not affect their social security check. However. payment to dad for labor and management advice would reduce his social security income if he earned more than $2.400 per year in wages. After 72 years of age any amount could be earned. Investment credit must be paid back to I.R.S. if machinery and other eligible property is sold; so it generally is best to hold this type of property in dad's hands until investment credit life is over. In the meantime, a lease arrangement can be worked out. The total income to parents after taxes can be used for living and other forma of security. The excess beyond these requirements would probably be distributed as gifts to the children depending on the circumstances. If it was needed for the above purposes and was reinvested in other assets, then the gross estate would continue to grow and this might defeat one of the purposes you set out to accomplish that of minimizing estate settlement costs and maxtmizing family satisfactions.
-5- 3. Sell One-Half of the Real Estate and the Remaining One-Half of the Chattels to the Farm Operating Son and Wite. The sale of both real estate and chattels would put the son in charge of the operational side and he could cash rent the parent's one-half interest of the land with THE UNDERSTANDING
that when they wanted to sell the remaining one-half the operating son would have first option to buy. The parents income flow from cash rent, interest payment~ and principle payment would not jeopardize the social security income. The payment to dad for consultation and labor could reduce social security income if over the minimum limit. A sound retirement plan for the parents including continued input of management and labor as long as desired and a continually prosperous farm business for the son and family are the objectives. At father's death (if he passes first), the installment payments and interest could continue to mother for her income security and exess beyond this need could be passed on to all children. 4. Incorporate the Real E,tate and Continue the Present Partnership. The real estate is hard to make divisable; so by incorporating the parents can distribute by gift or sale. shares of stock to the children. You might incorporate at the low adjusted cost basis of the farm assets, however, in case of gift, this would be the cost basis of the shares of stock in the hands of the children. Gift tax exemption and liability is based On the present value
of the stock the year the stock is given. It can be stated in the articles of incorporation the limitation on who can own stock and how they can be distributed. Parents can transfer shares of stock at their desired speed at a very miaimel cost. The operating partnership can rent the real estate from the corporation. Dad can sell his half of the partnership to the operating son on an installment plan when he decides to take life easier.
-6- Every fa~ situation is different and these 8uggestions may not be appropriate for your case. A trust, annuity program, or some other alternative may be more feasible. Your insurance man, accountant, trust officer, extension farm management man, and especially your lawyer are individuals with whom you may want to visit about your situation. You may feel that you are quite well off and that your family would be well prOVided for in any eventuality. However, even the heirs to a large estate may face large estate settlement costs if there is not sufficient advance planning. This can be particularly true if plaos are not made to distribute the estate according to the beneficiaries contribution to the building of the estate or to the parents' welfare.