Timing is Everything!
Why do you think Crystal balls, time machines and rubbing a genie bottle is a part of fables and folklore for generations? Wouldn’t it be nice to see into the future or go back in the past to change a decision? Everyone has a decision in their life that is accompanied by a stomach flutter. We all have good financial memories and bad financial memories where our timing was either too long, too short or just right! In selling a business, ranch, home or passing the wand to the next generation timing is everything. All of us at Venture West Ranches want to find the right timing for those big decisions in your life.
We are often faced with clients that decide to sell or let the next generation take over and want to do it quickly. I understand that. Once you reach that point there is a finality and ready to move on emotion that accompanies the decision. The unfortunate thing is sometimes that quick exit comes with a big tax bill, leaving money on the table or someone not ready to take over the ranch. A well thought out exit that is done with a few years of planning can put more money in the pocket and gives the next generation a better chance for success.
Timing is not just when you sell or turn ownership over but it is also how you minimize expenses of changing ownership and paying as little taxes as you can legally avoid. It is also about positioning the asset for the sale or for the next generation. This is why the Four Horsemen believe that whether positioning to sell or transitioning to the next generation of ownership, it should start years before the transaction to maximize dollars in the owners/family’s pocket and insure a smooth transition.
Here are a few tools that we have seen used to minimize taxes and smooth the transition to the next generation. Like a tractor to a farmer, these tools are necessities for you and your ranch. Before I start, let me say I would always suggest consulting a tax attorney, financial planner and your CPA when it comes to such potentially complicated transactions. That is what this team does and we do it very well with the clients needs being the center driving force.
The first useful tool I will mention is Gifting. Gifting is an incredibly good tool to potentially use in reducing estates, reducing capital gains taxes, transferring ownership and testing how children will handle money. It doesn’t always have to mean dollars out of pocket. It can be stock or interest in a property that may or may not involve cash distributions. Gifting as most know involves the ability to gift up to $14,000 in cash or value per year per person. It can be given while still retaining control of the asset and doesn’t necessarily mean you have to give cash to the recipient. I do think it is a good way to keep majority control and test how the next generation will handle a smaller distribution of funds. It is also a great way of reducing an estate over a period of time. If you consider a husband and wife can distribute up to $28,000 (cash, stock, value)per person per year, the numbers start adding up quickly if there is enough planning in advance. It must be the right situation but there are ways that you can do this without breaking the bank and having some protection of the asset still in place.
Another tool that can be used is Family Limited Partnerships or FLPs. This has to be an arm’s length transaction and the rules need to be followed strictly to stand up to tax scrutiny but it is a tool that can be used to maintain control of a ranch while being able to transfer ownership to the next generation and protecting the asset from unwanted creditors. This is not a one size fits all tool but it does work for reducing the size of an estate, transferring nonvoting stock to the next generation (to keep control), and protecting the property from unwanted creditors. It involves a general partner and limited partner(s). The general partner has complete control and the limited partners are silent partners that have no control and are limited to no decision-making abilities. In theory, a limited partner’s shares would be reduced because of the limitations of being a limited partner. So, it is possible that due to the limitations there is a reduction in the value of the asset and thus estate, due to the ownership of the limited partners. A FLP, like gifting, can test the ability of the next generation on how they spend proceeds. If the recipient doesn’t handle it well, the general partner has complete control on future distributions. This tool takes time to implement but it does bring some great things to the table for the next generation starting to understand the operation and opening discussions about the present generation’s hopes for what they would like to see happen with their life’s work.
These are just a couple of tools that we might be discussing at the Seminar. These tools are not one size fits all and may or may not fit your operation or family. They are discussed so ranchers can understand that by planning ahead transitions can be smoother and taxes can be minimized and money lessons can be learned.
There is one last thing planning ahead can do for you and the next generation. As a part time Professor at MSU, I am a big believer in educating future generations to give them the best opportunity for success. I have clients tell me that they learned through hard knocks and I think that has merit. The problem is that the world has become increasingly complicated and new operators need to be versed in multiple directions to navigate the business, regulatory, and tax environment that they may face. It also gives them a better chance to potentially flourish and grow the operation.
We look forward to discussing these and any other idea you would like to discuss in our roundtable discussion at the Cattlemans College at the Montana Stockgrowers Annual Convention in Billings on Dec 13-14th. If you would like to discuss a topic please email in advance the question or topic to [email protected] or via call or text at 406.580.4774. All correspondence is held in complete confidence and no names will be used in the discussion.
Remember we will be available on the 13th and 14th for free consultations of your specific situation. Just reach out to Buzz Tatom at the contact info above.
If you would like to see some of the recent comments we have received on our Seminar please read below:
“Excellent presentation…I learned a lot!” –D. W
“Please send an invite to the Stockgrowers’ Presentation. I want to go again.” –H. &P. K
“I want to come to the Workshop in Billings.” –M.J.
The Seminar is free to all Attendees. To sign up for the Montana Stockgrowers Annual Convention click register here.
If you would like to see us put on a free Seminar in your area please reach out to Buzz Tatom. We would be happy to discuss the possibilities.