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Presented by: William E. Roberts, CLU, ChFC AUCTORIS May 14, 2014

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

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Presented by: William E. Roberts, CLU, ChFC AUCTORIS May 14, 2014

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  1. Preparing to Become the Next Generation Presented by: William E. Roberts, CLU, ChFC AUCTORIS May 14, 2014
  2. 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
  3. Recent Family Business Study Of 500 Family Businesses surveyed: 50% plan ownership transition by 2016 70% have no written transition plan
  4. Six Issues in Ag Family Transition Planning Relationship issues Intransigent senior generation Siblings conflict Siblings spouses Multiple marriages resulting in non-blood line next generation heirs Mixing business and personal expenses The Numbers Three siblings beget eight children ….how to divide 8 ways
  5. Six Issues in Ag Family Transition Planning Operating siblings in conflict with non-operators The potential of an estate tax Creates a liquidity crisis Forced sale of illiquid farm or ranch assets Planning documents Don’t exist Out of date Values out of date Heirs not prepared for what they will inherit
  6. FAMILY BUSINESS
  7. 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.
  8. How is Most Transition Planning Created? It is often ignored Focused on Estate Planning Estate taxes are a primary driver of planning
  9. Critical Ingredient for Transition Success 9
  10. Competent Successors
  11. 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
  12. Ag Family Business Case Study
  13. Case Facts Neuberger Family-Owned Ranch Location in Eagleford Shale area of south central Texas 1200-1500 head of cattle (amount varies with drought and feed availability) >50,000 acres The ranch owned by the family for several generations
  14. Business Operations All assets – land, cattle, and mineral rights – owned in The Neuberger Family Ranch Corporation, a C-Corporation Neuberger Ranch Corporation is owned equally by the three siblings (G-3) currently living on the ranch
  15. Family Situation Parents are deceased, but left the ranch with considerable debt Bob Neuberger (oldest operating sibling) age 53, married to Evelyn Cal – age 24 Evan – age 22 Ellen – age 20 Billy – second oldest – age 51 and married to Lauren Darren – age 20 Sarah – age 18 Kevin – youngest brother – age 45, married to Jean Debbie – age 15 Robert – age 12
  16. 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
  17. 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.
  18. What are the challenges?
  19. 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
  20. 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
  21. Summary of Challenges The simmering conflict between the families has been keeping them from addressing their ranch succession planning Buy-Sell Agreement is out of date, underfunded, and does not match current objectives All the assets are owned by the operating C-Corporation
  22. Summary of Challenges Two of the seven G-4’s interested in operating the ranch … likely minority ownership Potential estate tax issues could force a sale Estate plans are out of date and are not taking advantage of opportunities to reduce estate tax at G-3 demise
  23. “Happiness is having a large, loving, caring, close-knit family…in another State”. – George Burns
  24. Succession Strategies Application
  25. 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”
  26. Current Buy-Sell Agreement
  27. Insurance Owner B Company $5.0M Death Benefit Paid to C-Corp Owner C as policy owner Sale of Shares C-Corp buys shares from Owner A's Estate Stock Basis $5.0M Owner's B & C keep Owner A's C-Corp their same basis since Estate C-Corp buys Owner A's Stock Shares Stock Redemption Issues 1. Death Benefit paid to C-Corp may trigger AMT 2. No Increase in Basis to surviving owners Buy-Sell Agreement
  28. Added Tax Cost (20% rate) Challenges Added ObamaCare Tax Cost (3.8%)
  29. Current Corporate Ownership Issues
  30. Current Corporate Structure All Business Units Under One C-Corporation Neuberger Ranch C-Corp Land & Cattle Mineral Rights Equipment Ranch Hunting Rights Operation
  31. 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
  32. 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 non-operating 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
  33. Solutions?
  34. 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
  35. C-Corp to S-Corp Neuberger Ranch C-Corporation Neuberger Ranch S-Corporation 90% 10% Non-Voting Stock Voting Stock
  36. Buy-Sell Design
  37. Buy-Sell Agreements Purpose of a buy-sell agreement Create a plan that defines control, value and dispensation of the stock under defined triggering events
  38. Buy-Sell Agreements 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
  39. Estate Tax Issues
  40. Transition Issues Howis the estatetaxfunded?? Family Taxes
  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 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 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 Important to seek outside specialist to deal with relationship issues “Relationship issues are the biggest liability a family business faces” Transition planning requires a team of advisors Next generation succession planning is more complicated due to the number of successors Outdated documents can be contentious The estate tax liability can complicate the best of plans 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? Manage & Use Wealth Wisely Healthy United Family High Self Esteem Building Trust, Communication & Team Through “Meaningful Experiences” All Leading to – Healthy Family Group Governance; Able to Manage Entities and Trust Structures
  51. What is Failure? Wealth Used Inefficiently & Wasted Unhealthy Divided Family Low Self Esteem Entitled Individuals All Leading to – Unhealthy Divided Governance
  52. Rating your Family’s Preparation Wealth Transition Checklist
  53. 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
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