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First, before we can talk about succession planning, we need to establish that the current generation wants someone to succeed them on the farm. From the Iowa State Surveys, 75% of farmers haven’t identified a successor no data on 25% who had identified them, if they had told the successor. Nearly 50% of farmers indicate that semi-retirement (withdrawal of some labor and management) is a close as they plan on getting to retirement. Another 30% plan to never stop providing labor and management to the farm.

If the farm operator never plans to quit really working, it makes it hard to plan to hand it off in life or death. Again, from Iowa State surveys, it appears that over 40% of farm operators are not talking to anyone regarding an exit plan of any type.

If you fall into this category of never planning to retire and not making any plans regarding transition, you are doing your family a disservice.  It is leaving the next generation dazed and confused regarding the future when you do die.

Having the Conversation about succession planning.

Consider whether you are having a family conversation or a business conversation. Discussion about farm succession choices before the turkey is served or the grandson hits the football field are going to be muddled, confused and not yield the result that anybody intended. Consider having the business discussions some other place than the kitchen table. It will help define that in this discussion you are not relating to one another as family but as business operators.

Everybody likes progress, cheap commodities like food, water and energy and nobody likes change. These are truths that can be bet upon time eternal regardless of what region of the country you are in. This is called the NIBY principle. Not In My Back yard.

Yet,  in order to achieve cheap commodities, quick access to what we want, infrastructure has to be in place. This year, BNSF railroad hauled nearly 1 million car loads of ag commodities across the country, with rail traffic into Minnesota , Montana and the Dakotas increasing by 31% in the last 5 years and outgoing traffic increasing b y 69%.  The oil production boom has something to do with  those numbers certainly.  All that traffic means more demand for existing rail space and the thought of more rail lines.

I doubt anyone is lining up to allow railroads to cut their fields up into smaller parcels. The same holds true for the Rock Island Clean Line energy lines. This project will deliver 3500 megawatts of energy from Northwest Iowa to Illinois and other eastern states over 500 miles. While many landowners will eventually give easements, others will not be swayed. We use eminent domain as a process to allocate between the rights of an individual and the needs of society for improvement and progress. This process is a lengthy one. In February , the proponents of the energy line asked the Iowa Utilities board to approve their concept and plan and then allow them to go back in to use eminent domain for the parcels that would not sell. This was not allowed by the board. If it had been, the leverage the energy line would have been able to bring to bear would be large. It is much easier to take away one parcel from the unwilling when all others have already given in and been paid. It is a far more difficult row to hoe when many parcels are not yet secured. Currently 1248 objections have been filed to the line and less than 15% of the proposed route has been secured via voluntary easements.

When I first moved to Sumner as a kid, I was asked to be in a rock group. I said I preferred country music. It turns out the rocks are here EVERY year and you get paid to pick them up, which was a change from my earlier experience in the hills of Clayton County. Tis the season of rock picking, hay making and detasseling is not far behind. While this work isn’t as readily available as it once was, it still plays an important part of our local economy.

Whether a child who is a dependent has to file his or her own return generally depends on two easily determined factors: whether the money is earned or passive and the amount of income. That is, for most kids, did you put it in the bank and watch it grow or did you get your hands dirty or give up your time to get the money.

The rule for children and other dependents is that if the only income is earned and it is less than $5,700, there’s no need to file a federal income tax return.

Even if your child doesn’t have to file a federal income tax return, he or she may want to file a return if federal income tax was withheld from income. This doesn’t usually happen for farm jobs or babysitting, but it might if they fill out the W4 wrong at the fast food restaurant. Your child might also want to file if he or she qualifies for certain credits which would result in a refund.

The rules are different for unearned income like dividends and interest. It is referred to as the “Kiddie Tax”.  For children under the age of 18, or under the age of 23 while a full time student, the first $950 is considered tax-free and the next $950 is taxed at your child’s rate. Unearned income over $1,900 is taxed at the child’s parents’ tax rate  

70% of North American farms will change hands by 2025. This is not just ownership, but who farms the land. This provides plenty of opportunities for American farmers. We need to get over the concept that farming is a lifestyle that deserves special provisions protections and romanticism. It is apparent that it is a business to the non farm sector, and unless the operators of farms act like business men and women, they will be consumed by those who do. Direct payments and counter cyclicals will be under attack and likely crop insurance will be offered up to replace the guarantee payments. The kitchen table  and the board room table are two different places for a reason.

Farming has 3 golden times in the last 100 years (1) during the 1910's (when the US fed Europe as Europe shot each other into the stone ages), (2) during World War II (when every body wanted to be like Europe and shot everything back into the stone ages)  and the period thereafter and (3) during the mid 1970's (again when our competitors abroad couldn't meet the demand).  Drive through the country and look at when houses were built. Lots of 1915 builds still dot the country side, with plenty of post World War II expansions and 1970's ranch style houses. Coincidence, I think not.
Perhaps another set of good times happened from 2008-2012  Number crunchers indicate that for the period 2002-2012 years indicate that farmers have had the best overall profitability over the those three years

Good times are defined by the lack of good times that follow. If we are in a good time, it is important for agriculture business operators to take advantage and prepare for the bad that follows.
So how does a farmer operator behave like a business operator? Acknowledge the elements you need to be successful, assemble those elements and place them into action.
     
Acknowledge that you must consider   management of revenues, farm input costs and   your interest rate management. These will need to be balanced. Obsessing over one will hurt the other two. Getting a handle on costs of production will help you make sales decisions that are rationally based, not emotionally based on who has the best bragging rights at the Co-op.
Another item to watch is your repayment capacity.  This is calculated by taking your net farm income adding non-farm income plus depreciation and interest expense on long-term debt and capital leases.  From this total, subtract long-term debt and capital lease payments, net cash incurred for equipment purchases required annually and family living expenses.   This math formula this tells you how liquid you are for this year and the upcoming year.  If this ratio is less than 1, you will have liquidity problems.  It should be greater than 1.5 to 1 to be comfortable and above 2 will give the liquidity to expand, etc. Knowing this will take a lot of drama out of going to see the banker.

Friday, February 21, 2020
  • Patrick B. Dillon
  • Jill Dillon
Dillon Law PC
Patrick B. Dillon enjoys finding solutions to legal issues and catching problems for clients. Pat practices in the Sumner office regularly represents clients in district, associate district and magistrate courts for agricultural, real estate, criminal and collection issues. He drafts wills and trusts, creates estate plans and helps clients through the probate process.
Dillon Law PC
Jill Dillon focuses on family law, estate planning and IRS matters. Jill is a University of Northern Iowa undergraduate (Political Science Cum Laude) and a Drake University Law School graduate. Jill spent extensive time advocating for low income tax payers in front of the IRS and the State of Iowa Department of Revenue while at Drake.

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