Farm Succession Planning – Never to Early or Too Late

VT farmers face succession planning challenges head-on with help from local groups.

In Vermont, senior farmers age 65 or older operate 28% of the state’s farms. Of these 2,076 senior farmers, just 9% of them have someone under age 45 managing the farm with them. The 363,600 acres and $1.2 billion in land and agricultural infrastructure they own will transfer ownership in the next 10+ years in one way or another.

Transferring The Farm Workshops help VT farmers understand the options, resources and steps to transferring a farm business or farmland will be held February 12th from 9:00am to 3:30pm at UVM Extension classroom in Berlin VT (snow date of February 15th). Topics include why succession planning is important, retirement and estate planning, addressing tax issues in a transfer, legal entities and tool you can use to transfer farm assets, and determining your goals for retirement, business transitions, and your land. Local groups and experts will offer assistance to VT’s senior farmers.

“It’s never too early – or too late – to plan for your future and the future of your farm,” says Mike Ghia, Vermont Field Agent for Land For Good. “At no point is a farm’s future more at risk than during this transition,” says Ghia of farmers without proper succession or transfer planning assistance. Land For Good (LFG) is a non-profit organization that helps farmers navigate the complex challenges of land access, tenure and transfer. They also work with farmers who do not have an identified successor to whom to pass on the farm.

The workshop fee is $10 per farmer and includes lunch. For more information or to register, call Land For Good at 603-357-1600 or at landforgood.org/rsvp.

The workshop is sponsored by Land For Goodin partnership with Vermont Housing & Conservation Board, Dinse Law, Intervale Center, UVM Extension, and Yankee Farm Creditand is funded in part by the USDA National Institute of Food and Agriculture through its Beginning Farmer and Rancher Development Program.

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Growing a Business while Growing Up

Originally published in UVM New Farmer Blog

With her prize-winning registered Border Leicester sheep flock, Lydia Smith is a beginning farmer to watch. Lydia’s business, Echo Ridge Flock, sells breeding stock, feeder lambs, raw fleeces, wool blankets, pelts and meat, and provides shearing services for other small farms. Lydia started her business six years ago at age 14.

Lydia’s farm business was a natural off-shoot to her family’s farm, Vinegar Ridge Farm, in Charlotte, Vermont.  Lydia was two-years old in 2000 when her parents purchased two Romney ewe lambs, soon followed by some Border Leicesters and the flock grew exponentially.

“At first, it was a fun little hobby that I didn’t take too seriously.  When my older sister went to college and found herself too busy for sheep, another sister and I took over the management of the flock.  Then, something clicked,” she says.”

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Lydia Smith showing her sheep

“Two years later, at 14-years-old, I purchased my first sheep and Echo Ridge Flock began. Now, we have twenty-five brood ewes on about ten acres.  I make the majority of the genetic and nutritional decisions,”  Lydia says.

Most of Lyda’s sheep are registered Border Leicesters, a handful are registered Lincolns and a few are crossbreds.

While logistics limited Lydia’s enrollment in 4-Hto just one year, she feels part of the 4-H community and says, “Without 4-H, I would not have seen those kids mature into the strong individuals they are today.  Each of us has had our struggles through the years and the sheep community has become the safe space for a lot of hurting kids.”

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Lydia has formed many deep relationships, gained confidence, and learned lessons beyond raising sheep through the sheep showing community.  Lydia described Joe Seavey, “a grumpy old shepherd from New York.  He told me that shearing was the only way to truly know my flock.  He was right; through shearing, Joe demanded excellence, yet was not competitive in the typical sense, saying, ‘The only person you should compete with is yourself.’ Essentially, I only had to be better than I was yesterday.  I work a little harder and stand a little taller today because of that man.”

While Lydia’s knowledge of sheep is ahead of her years, it was at Vermont Techwhere she took business and agricultural classes that could be directly applied to her current business.  Growing up on a small farm, Lydia could build her flock without purchasing any infrastructure or equipment initially, building her little business piece by piece. While she knows other new farmers are in a different situation, she observes that “retired farms and farmers are often available and willing to help startups for a low rate.  I use pastures on two other properties to extend my grazing.  Without my sheep, those properties would be mowed or left to overgrow.”

UVM New Farmer Project’s Suzy Hodgson  talked to Lydia about her growing a business while growing up.

SH: What has surprised you about sheep farming

LS: You are never done learning.  Every lambing season, my ewes teach me something new.  Every season, the weather is different and my management must adjust accordingly.  I am always working to improve and therefore I am always discovering and trying new things. I make new mistakes every year, but also get closer to producing the animals I want.  Sheep have a knack for getting themselves into trouble.  I never thought I would perform CPR or treat concussions.  Many a diapered lamb has slept in my bed.

SH: If you could rewind the clock, is there anything you would have done differently?

LS: I would go back and sit a little longer with the old guys.  They have so much to teach us, something I did not fully appreciate until I was fifteen or sixteen. While they taught me so much, I could have learned more.  Above all, there are individuals that I never got to thank. Farmers in general and shepherds specifically are a dying breed.  The industry has lost many key figures in recent years.  I hope that I can share a bit of what I learned from them with the next generation.

SH: Any tips or pointers you’d like to share about sheep raising?  

LS:  1. If you do not truly love what you do, get out now. There is no room for the undecided.If you simply like sheep and think they are cute, get a few fiber animals and leave it at that.  Raising any livestock is heartbreaking at times. The good days will outweigh the bad, but it often does not feel that way.  I have had days where I considered selling the whole lot, days that just seemed too hard.  Then a healthy lamb is born and a sick one turns around and I get up and do it another day.”

2.Go sit with the old, cranky guy in the corner. Ask about his animals and then just listen. You will learn more from him than any textbook. Perhaps during lambing you’ll remember a trick from one of his rambling stories and save your first lamb.  Maybe you’ll identify an illness that much sooner because he had ten cases one year.

3.Do your research before selecting a breed. I don’t mean in a book. Talk to actual breeders raising the specific breeds you are interested in under similar conditions. The most common problem I see is new shepherds’ impulse buying sheep based on appearance or biased advice.  Every breed association and many breeders only highlight the traits they think people want to hear.  Bloodlines behave differently in different regions and management systems.  Find a breeder whose sheep you like and who you trust.  At the end of the day, you have to like the sheep in your barn.

SH: How your farm changed since you started, and why did you made these changes?

LS: While the products have remained the same, the priorities have shifted at times.  When the flock began, it was purely for fiber.  When my oldest sisters decided to show the sheep, an emphasis was placed on appearance and the production was poor.  In recent years, the goals have shifted to producing the best purebred possible that can excel with minimal input.  Few local breeders care about the showring; they want animals that thrive in the harshest conditions.  For me, that market is the most valuable.  I also have focused in on the type and color of fleece I want to produce, which has given me access to a bigger fleece market.

SH: What’s next? Where do you hope to take your farm skills over the next few years?

LS: Through showing sheep, I have made many connections.  One of these has led me to pursue a career in Delaware.  With the current economic climate, affording my own Vermont farm is many years off, and jobs in my field are a bit scarce. Delaware presents many new opportunities and experiences for a recent college graduate in the agricultural industry.  Someday, I hope to bring my little flock back to the state that will probably always be my home.  In the meantime, I’ll pack up my crew and head down this winter.  Fifteen sheep, two goats, a dog, and a twenty-year-old – what could possibly go wrong?”

LS: How do you manage risk?

There is only so much you can do to manage risk on a farm. We are at the mercy of the weather not only locally but nationally.  Feed and fuel prices are beyond our control.  Disease can plague even the best managed flock.  We all have bad years.  Minimizing the damage is the best we can do by having a plan for any crisis.

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Estate Taxes & Farms: Who Wins & Who Loses?

image of Bob ParsonsEditor’s Note: This post comes from University of Vermont Extension agricultural economist Bob Parsons, whose research and extension work focuses on agricultural financial management and farm succession issues. 

I want to clarify a point about the proposed elimination of the federal estate tax.

By current law, estates under $5.49 million are not subject to estate taxes.  And with a bit of planning, a couple can have $10.98 million of an estate not subject to estate taxes.  And the current level is pegged it inflation so the amount subject to tax will move with the economy.

One point to remember is that estates taxes are applied to the net estate, not the gross estate.  So it’s the amount after all bills have been paid.  An individual with $7 million in assets but also with $2 million in debt has a net estate of $5 million, none subject to federal estate taxes.

The American farmer has always been a poster child for efforts to eliminate the estate taxes.  But very few farm families are subject to the estate tax. 

What usually is not mentioned is the possible elimination of the step up in basis that benefits all individuals, especially individuals who invest in business assets held a long time and slowly increase in value.  Sounds like farm land?  Perfect example!

So what is basis? Basis is the book value of an asset, generally the purchase price less depreciation.  Basis is important in determining the capital gains tax one would owe if they sold an asset.  You but a tractor for $20,000 20 years ago.  You depreciate the tractor on your taxes so now the book value is zero.  But the tractor still works.  You sell the tractor for $10,000 today.  The full amount is taxable because the book value is zero and you have made a gain that is taxed as capital gains.

Same thing for cows.  Most cows are farm bred and expenses are written as incurred.  The cow has a tax basis of zero.  Sell a cow for beef or dairy and usually the full amount is subject to capital gains tax.  These are normal tax event in a farm business.

The step up in basis is a part of the estate tax code.  At the time of death, assets are distributed by will or in a trust as directed by the individual and valued at current market value.  You may inherit some valuable antique, stamp collection, or cows, farmland or tractor.  What is the tax situation?  If the estate was valued under $5.49 million, there is no federal estate tax.

But what about the individual who inherited the property?  It works like this.  You inherit 100 cows valued at $1600  per cow, totaling $160,000.  You do not owe taxes unless you sell them above the basis.  What is the basis?  A reputable appraiser put the value of the cows at $1600 each at the time of death.  So that is the cows new basis, no matter whether their basis was $0 or $1200.  The person who inherited the property can sell the cows for any amount up to $160,000 and pay nothing in capital gains tax.

How about land, generally the highest value farm asset?   Here is the big impact.   Buy a farm 30 years ago for $50,000.  Can’t be depreciated so book value remains at $50.000.  Today the farm is worth $800,000, farms biggest asset.   The farmer dies owning the farm.  After taking an inventory of all assets and paying off debts, the farmer’s estate is worth $3 million.  Not subject to estate taxes so that is no worry.

Now, lets look at the heir’s situation.  The farmer leaves the farm to his daughter who has worked with her parents for years.  She now owns the farm and a tax basis of $800,000.  She can sell the land for $800,000 and not pay one penny in capital gains tax.

Now let’s assume the estate tax is eliminated, and with it the step up in basis.  The farm is now valued at $800,000 but has a basis of $50,000.  Daughter does not have any children planning to take over the farm.  She is getting chronic aches and pains, and decides to retire from farming.  Has an offer of $800,000 and sells the farm.  Capital gains goes like this.  Sales price minus basis = taxable capital gain.  $800,000 minus $50,000 = $750,000.  Capital gains tax runs 15-20% depending on the individual.  The daughter now faces capital gains tax of at least $112,500 or as much as $150,000.  All due to elimination of the estate tax.

This is what could happen if the estate tax is eliminated.  The contrast is quite clear.

  1. People with estates over $5.49 million will not have to worry about estate taxes.
  2. Everyone with estates under $5.49 million will not have to worry about estate taxes.  They didn’t have this worry before.
  3. Everyone loses the step up in basis.

Who gains and who loses?  Depending on your opinion, who wins and who loses may be debatable.  But when you hear about the disadvantages of the estate tax, don’t forget that the free step up in basis gives a huge benefit to families with lower valued estates.  So be cautious when you hear debates on the estate tax because you rarely hear about elimination of the step up in basis, which can benefit farmers as well as people who inherit a valuable antique or stamp collection.

 

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