Generational transfer of the ranch was discussed during the 2017 School for Successful Ranching by Robert Wells and Dan Childs of Noble Research Institute. Material in this article was taken from their presentation unless otherwise noted.

To avoid transferring a liability instead of a legacy, transitional planning should begin years ahead of the actual passing of the reins. Everyone needs a transitional plan, but the most vulnerable to the lack of transitional planning are young families, ranches on the edge of viable size, families and ranches with limited asset liquidity and families with complex personalities.

Three situations can occur when you pass from this world without a transition plan: You may leave without knowing exactly what you have or how much it is worth. No one will remember what you said — he or she will remember only what is written. At least one family member will lose his or her mind over sorrow, confusion and/or greed.

There are many advantages of a family owned business (Table 1) and transitional planning is necessary to ensure that future generations enjoy them. Hopefully, a business with assets, legacy and wealth will be transitioned in a way to provide a blessing, not a burden.

Do you have an estate-tax problem? In 2018, the federal estate tax emption is $11.2 million for an individual or $22.4 million for a married couple. This is only a concern if the total value of the estate exceeds the tax exemption amount. If the estate value is greater than the exemption, a 40-percent tax is levied on the amount above the exemption. This can be avoided through transitional planning.

Transition plan

In developing a transition plan, you first should determine what will transfer and its value. Prepare a balance sheet that is a systematic organization of everything owned and owed by a business or individual at a given point in time. A balance sheet is a snapshot in time of financial position (net worth) and source of equity whether it is land or liquid assets. The Business Dictionary describes liquid assets as those that can be converted into cash within a short time, with little or no loss in value. Liquid assets include items such as accounts receivable, bank account balances, stocks and bonds. Additional information to include in the transition plan is how the assets are owned.

The anticipated retirement lifestyle is also part of the transition plan. What do you plan to do after retirement — travel the world and stay in luxury hotels, do volunteer work, pursue some long-awaited hobbies or simply support the kids and grandkids? Regardless of the lifestyle choice, plan for a long retirement. In the year 2000, there was a 75 percent probability for men living to the age of 78, 50 percent probability of living to 85 and a 25 percent chance of living to 91. The probable ages of women were two to three years higher than men.

What are the income sources for supporting a long retirement period? Possible sources are spousal income, Social Security, ranch assets, savings and investments, work during retirement or pension plans.

An important thing to remember in writing a transition plan is that “equal” is not the same as “equitable.” Equal is defined as same in quantity, size, degree or value. Equitable means fair and impartial.

“When planning for transition of ranch ownership, one of the major hurdles is always how to appropriately deal with children who are not participating in the operation. Rarely would all the children desire to work in the ranch operations. Succession planning should involve a decision-making process that:

• Protects ongoing viability of the agricultural operation.

• Provides for orderly transition of the agricultural operation to new ownership.

• Preserves family harmony.

A newsletter from the Hallock & Hallock Law Firm of Logan, Utah, which specializes in transitions, said, “Most parents want to treat their children fairly in their estate planning and many assume this means having their children inherit equal amounts of value. When it comes to transitional planning for a family ranch, fair will almost never mean equal.”

Estate plan

Estate planning is a crucial part of the transition plan and encompasses one of three methods. Intestate succession automatically occurs when there is no will, the will is partially or completely invalidated or a trust exists but assets were not transferred to it. A surviving spouse will always take at least some of the intestate estate unless there is prenuptial agreement in place. Only blood relatives and/or adopted children can receive inheritance. Stepchildren and in-laws are not eligible.

An advantage of intestate succession is that it requires little or no effort from the estate owner. There are several disadvantages of intestate succession, however. You are unable to select who handles your affairs and several people may volunteer. The owner is unable to direct who gets the property — succession rules dictate heirs. There is no provision for stepchildren, nephews, cousins, charities or any outside parities.

The second method of estate succession is a will which is a set of directions for distribution of your property after you pass away. A will is effective only after you pass away. For a will to be valid, you must have testamentary capacity when it is written. Testamentary capacity is defined as a term used to describe a person’s legal and mental ability to make or alter a valid will. A will must be executed correctly and probated. Advantages and disadvantages of wills are found in Table 2.

Trusts are the third method of estate succession defined as sets of instructions for management of a legal entity. A trust can be simple or complex, but it must be drafted carefully to ensure your goals and objectives are met. It involves a trustor, trustee, beneficiary and trust property. Items to consider in creating revocable living trusts include duration, rights of the trustee, uses of trust income and principal and timing of distribution to beneficiaries.

Trustees can include buy, sell and lease property; lease mineral rights; invest funds; distribute trust income; and distribute trust principal. Advantages and disadvantages of trusts are found in Table 3.

Successful transition

There are five steps to successful transition:

• Determine current status of the estate

• Communicate with stakeholders; develop business succession, estate and gift plans; and deployment of plans. First determine where you are now by preparing a balance sheet. Great families have great communication, so communicate with the stakeholders throughout the planning process.

• Develop business succession and estate/gifts plans to support the transition plan. Periodically evaluate the transition plan and revise it when appropriate.

Success of transition plans is greatly enhanced when they are prepared with the right professional help.

• Ask people with transition plans which professional they used and if they were happy with the service. Professional association directories also can act as a source of names. Interview the professional before hiring, ask for references and check the person’s credentials. Then contact the references and get their evaluations of the professional.

• Ask for a written engagement agreement and involve other stakeholders in selection.

Leave your heirs a legacy, not a liability, through a good planning process.