John R. Baker Attorney at Law 1-800-447-1985 jrbaker@iastate.edu

1. What’s It Worth If You Stay On The Farm John R. Baker Attorney at Law 1-800-447-1985 jrbaker@iastate.edu Photos by USDA NRCS

2. NOT EVERYTHING THAT CAN BE COUNTED COUNTS AND NOT EVERYTHING THE COUNTS CAN BE COUNTED. Albert Einstein (1879 – 1955)

3. A Critical Difference How we define “family”, the priorities, expectations, relationships, and measures of success in a family are, and should, be different than the priorities, expectations, relationships and measures of success in a business.

4. Identify Which System • It is imperative that you know which system is appropriate in a given situation. • It is appropriate to behave as a family at a holiday. • It is not appropriate to behave as a family at a business meeting.

5. If the ship-building art were in the wood, it would produce the same results by nature. Aristotle (384 BC – 322 BC) If a farm succession a were in the assets, it would produce the same results by nature. John Baker (1947 - ????)

6. THE FARM Owner’s priority Continuation of farm family business Owner’s priority Continuation of family ownership of farmland SUCCESSION PLAN ESTATE PLAN Assets Money Management BUSINESS SUCCESSOR HEIRS

7. In a 2006 Iowa Survey a majority of farmers who had an estate plan responded that the best plan was to divide the farm equally among the heirs.

8. Equal is Fair. Isn’t it? The worst form of inequality is to try to make unequal things equal. Aristotle(384 BC – 322 BC)

9. “I’ve spent my entire life paying off my uncles. Now I’ll spend the rest of my life paying off my brothers.” English farmer, Devon, UK 2002

10. Dad and Mom have asked Sarah to come back and eventually take over the farm family business. They have offered Sarah an annual salary of $52,000 per year. Sarah has one sister and two brothers. None are interested in taking over the farm family business. Dad and Mom have stated that they will treat all their children equally.

11. Mom and Dad have told Sarah that she will receive $250 per week and that each of her sibling will receive $250. Sarah, her sister and her brothers have been treated equally. Does this sound fair to you? If it is not fair during the life of the owner then what makes it fair after the death of the owner?

12. KEY CONCEPT Compensation = Contribution

13. Contribution = Compensation • 1990 the owner has a net worth of $300,000 • 3 children: If divided then each receives $100,000 • By 2010 the net worth has grown to $3,300,000 • If no successor the each child inherits $1,100,000 • One child is the successor • Contribution = Compensation • The Owner determines that one half of the increase is due to the efforts of the successor • Therefore, the owner’s share is $1,500,000 • Therefore, the successor’s share is $1,500,000

14. The successor’s share of the Owner’s estate is: • 1990 From the Owner’s share $100,000 • 2010 Successor’s efforts $1,500,000 • 2010 From the Owner’s share $500,000 • TOTAL inheritance $2,100,000 • Each Siblings’ Share of the Owner’s estate is: • 1990 From the Owner’s share $100,000 • 2010 From the Owner’s share $500,000 • TOTAL inheritance $600,000

15. Equitable Division of Property • Equal is not fair. • An equitable division allows the On-Farm Heir to be compensated for the increase in the wealth they have created and protected. • An equitable division also gives the On-Farm heir a greater chance of being able to keep the farm.

16. Basics for compensation of the On-Farm Heir? • Time • Market price of labor • Value Added to Farm • Preserved wealth • Management

17. Case Study The Miller family is a typical Iowa family who own and operate a farm family business and they want it to continue for another generation. Only one of their children is interested in farming.

18. The Miller’s • Denny and Mary: Farmers in Smallville, IA. • Denny farms with his father, Tom. • 3 children: Chris, Kevin and Kathy. • Only Kevin wants to farm. • Mary and Denny love all their children and wonder how to divide assets when they are gone.

19. The Miller’s: Part One • Kevin is 21 and has a cattle herd of 10. • He is in college and will finish this year. • Since he hasn’t contributed to the farm, no compensation is needed • Equal division would be fair because Kevin hasn’t made a contribution to the business.

20. The Miller’s: Part Two • Mary and Denny are 65. • Kevin is 41 and is married to Grace w/ 3 children: . • Denny and Kevin have been farming together for 20 years. • Kevin makes some management decisions. • 2,000 acres are farmed by Denny and Kevin. • Their herds have grown significantly. • How do we value Kevin’s contribution to the farm?

21. Factors to Consider • What value has Kevin added to the farm? • What value has Denny added because he knows Kevin is going to take over? • Has Kevin built assets on Denny’s land? • What amount should Kevin receive for management decisions? • Has Kevin made repairs, improvements to property?

22. Now, how do we value? • There is no exact formula to do this! • However, we can place values on services and increase in wealth/value/etc. • Once values have been determined, we can multiply this by the number of years Kevin has worked on the farm.

23. The Miller’s: Part Three • Denny’s dad, Tom, passes away. • Denny is having back problems and finds it difficult to ride tractor. • Kevin’s daughter, Jessica, and her husband want to come back and farm. • Half of cash leases have been transferred to Kevin’s name. • Kevin has assumed the hay operation and all management. • Denny is slowly phasing out of the business. • How do we value Kevin’s contribution to the farm?

24. Factors to Consider: • The value has Kevin added to the farm. • Kevin’s assets that are on Denny’s property. • The physical work does Kevin do on Denny’s land. • Compensation for Kevin manager for Denny and Mary. • Compensation for record keeping. • Wealth preserved because of Kevin’s presence. (i.e. living in a farm house that would have deteriorated)? • Personal services performed by Kevin and Grace

25. Now, how do we value? • There is no exact formula to do this! • However, we can place values on services and increase in wealth/value/etc. • Once values have been determined, we can multiply this by the number of years Kevin has worked.

26. The Miller’s: Stage Four • Denny dies; Mary’s health declines rapidly • Kevin and Grace help her w/ almost everything; i.e. chores, doctor visits, cooking meals, laundry, etc. • Cows are gone; Kevin uses buildings, shop, grain bins, etc. on farm • Kevin received all Denny’s machinery. • Mary now owns the entire land because her and Denny had a joint tenancy. • How do we value Kevin and Grace’s extra work on the farm and caring for Mary?

27. Factors to Consider • Would the farm business still exist without Kevin? • Would Mary be in a nursing home if Grace and Kevin didn’t care for her? • Are Kevin and Grace receiving other benefits by staying on the farm? • How much value has Kevin added to the farm? • Is Kevin the managing the entire business? • Increased profits due to Kevin’s management?

28. Now, how do we value? • There is no exact formula to do this! • However, we can place values on services and increase in wealth/value/etc. • Once values have been determined, we can multiply this by the number of years worked by Kevin.

30. Presented by: John R. Baker Attorney at Law jrbaker@iastate.edu 1-800-447-1985