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Presented by: William E. Roberts, CLU, ChFC AUCTORIS May 14, 2014 Preparing to Become the Next Generation.

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Presentation on theme: "Presented by: William E. Roberts, CLU, ChFC AUCTORIS May 14, 2014 Preparing to Become the Next Generation."— Presentation transcript:

1 Presented by: William E. Roberts, CLU, ChFC AUCTORIS May 14, 2014 Preparing to Become the Next Generation

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 2

3 Recent Family Business Study Of 500 Family Businesses surveyed: 50% plan ownership transition by 2016 70% have no written transition plan 3

4 Six Issues in Ag Family Transition Planning 1.Relationship issues a.Intransigent senior generation b.Siblings conflict c.Siblings spouses d.Multiple marriages resulting in non-blood line next generation heirs e.Mixing business and personal expenses 2.The Numbers a.Three siblings beget eight children ….how to divide 8 ways 4

5 Six Issues in Ag Family Transition Planning 3.Operating siblings in conflict with non- operators 4.The potential of an estate tax a.Creates a liquidity crisis b.Forced sale of illiquid farm or ranch assets 5.Planning documents a.Don’t exist b.Out of date c.Values out of date 6.Heirs not prepared for what they will inherit 5


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. 7

8 How is Most Transition Planning Created? It is often ignored Focused on Estate Planning Estate taxes are a primary driver of planning 8

9 Critical Ingredient for Transition Success 9 9

10 Competent Successors 10

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 11

12 Ag Family Business Case Study 12

13 Case Facts A.Neuberger Family-Owned Ranch B.Location in Eagleford Shale area of south central Texas C.1200-1500 head of cattle (amount varies with drought and feed availability) D.>50,000 acres E.The ranch owned by the family for several generations 13

14 Business Operations A.All assets – land, cattle, and mineral rights – owned in The Neuberger Family Ranch Corporation, a C-Corporation B.Neuberger Ranch Corporation is owned equally by the three siblings (G-3) currently living on the ranch 14

15 Family Situation A.Parents are deceased, but left the ranch with considerable debt B.Bob Neuberger (oldest operating sibling) age 53, married to Evelyn 1.Cal – age 24 2.Evan – age 22 3.Ellen – age 20 C.Billy – second oldest – age 51 and married to Lauren 1.Darren – age 20 2.Sarah – age 18 D.Kevin – youngest brother – age 45, married to Jean 1.Debbie – age 15 2.Robert – age 12 15

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 16

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. 17

18 What are the challenges? 18

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 19

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 20

21 1.The simmering conflict between the families has been keeping them from addressing their ranch succession planning 2.Buy-Sell Agreement is out of date, underfunded, and does not match current objectives 3.All the assets are owned by the operating C-Corporation 21 Summary of Challenges

22 4.Two of the seven G-4’s interested in operating the ranch … likely minority ownership 5.Potential estate tax issues could force a sale 6.Estate plans are out of date and are not taking advantage of opportunities to reduce estate tax at G-3 demise 22 Summary of Challenges

23 23 “Happiness is having a large, loving, caring, close-knit family …in another State”. – George Burns

24 Succession Strategies Application 24

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” 25

26 Current Buy-Sell Agreement 26

27 Buy-Sell Agreement 27 C-Corp Stock Basis Owner's B & C keep their same basis since C-Corp buys Owner A's Shares Owner A's Estate Sale of Shares C-Corp buys shares from Owner A's Estate Owner B Owner C Insurance Company $5.0M Death Benefit Paid to C-Corp as policy owner $5.0M Stock Stock Redemption Issues 1. Death Benefit paid to C-Corp may trigger AMT 2. No Increase in Basis to surviving owners

28 Challenges 28 Added Tax Cost (20% rate) Added ObamaCare Tax Cost (3.8%)

29 29 Current Corporate Ownership Issues

30 30 Neuberger Ranch C-Corp Current Corporate Structure All Business Units Under One C-Corporation Ranch Land & Cattle Mineral Rights Equipment Hunting Rights Operation

31 31 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 Challenges

32 32 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 Challenges

33 Solutions? 33

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 34

35 35 Neuberger Ranch C-Corporation C-Corp to S-Corp Neuberger Ranch S-Corporation 10% 90% Voting Stock Non-Voting Stock

36 Buy-Sell Design 36

37 Buy-Sell Agreements 1.Purpose of a buy-sell agreement –Create a plan that defines control, value and dispensation of the stock under defined triggering events 37

38 Buy-Sell Agreements 2.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 38

39 Estate Tax Issues 39

40 40

41 Transition Issues How is the estate tax funded?? 41 Taxes Family

42 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 Estate Issues

43 Gifting Considerations 1.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

44 Gifting Considerations 2.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

45 A Plan to Pay the Estate Tax –Section 6166 –Life Insurance – A combination 45 Estate Issues

46 Irrevocable life insurance trust –Keeps insurance out of the estate –Provides liquidity when needed –Can be funded with income producing gifts –Premium financing 46 Estate Issues

47 “The definition of crazy and impossible is doing the same thing over and over again and expecting different results!” - Albert Einstein 47

48 Lessons Learned from Neuberger Case 1.Important to seek outside specialist to deal with relationship issues a.“Relationship issues are the biggest liability a family business faces” 2.Transition planning requires a team of advisors 3.Next generation succession planning is more complicated due to the number of successors 4.Outdated documents can be contentious 5.The estate tax liability can complicate the best of plans 6.The next generation is often frustrated by their parents issues and lack of a plan 48

49 Shirtsleeves to Shirtsleeves? 49

50 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

51 What is Success? 51 Health y United Family High Self Esteem Building Trust, Communication & Team Through “Meaningful Experiences” Manage & Use Wealth Wisely All Leading to – Healthy Family Group Governance; Able to Manage Entities and Trust Structures

52 What is Failure? 52 Unhealthy Divided Family Low Self Esteem Entitled Individuals Wealth Used Inefficientl y & Wasted All Leading to – Unhealthy Divided Governance

53 Rating your Family’s Preparation Wealth Transition Checklist 53

54 54

55 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 55

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