It’s a dilemma many farmers worry about: How do you protect the viability of your farm operation when one of your partners dies? Diversified grain and vegetable farmer Rick Fruth of Napoleon, Ohio, has come up with a creative solution that protects both the capital investment and the control of the management decisions in his collaborative farming operation.
“If we simply had a buy-sell agreement triggered by death, that wouldn’t necessarily preserve the capital in the operation because we’d have to buy the heirs out,” said Fruth. But if there was a way for survivors to retain their investment and still give the on-farm partners full management control, that would be the ideal solution, thought Fruth.
So, Fruth and his four farm partners formed a limited liability company that provides the capital for their farming operation (NVF Capital). Then each partner could designate the capital company as the trustee of their individual trusts.
“These trusts may own farmland or they may simply own the partner’s share of one of the various farming entities,” explained Fruth.
“When I die, my wife and children are the beneficiaries of the trust, which owns my shares of the farm entities. But the capital company, comprised of the other farm partners, is the trustee and handles all the financial decisions of the trust,” explained Fruth. “My heirs benefit financially without having a part in the farm management decisions.”
Fruth believes that’s an ideal arrangement, since the farm has a history of solid profits that beat alternative investments like stocks or bonds. Some multi-operator farms choose to buy life insurance to fund buyouts at death, but premiums can be expensive, depending on the age or health of the insured. Insurance also drains capital that could be put to work on the farm.
As long as his heirs are happy with the farm’s capital company as the trustee, Fruth reasons, there won’t be any changes in the financial needs or management of the farm operation.
“My main goal was to preserve capital in the farming operation and offer my heirs a means to maintain their ownership when I am gone,” he said. At the same time, the arrangement restricts the heirs from interfering with on-farm management decisions.
His survivors can still exercise control, should they need the cash or be unhappy with returns. “Now if my wife and children want to fire NVF Capital as their trustee, it will trigger a buy/sell agreement,” he added. The payment will be structured according to the terms of the buy/sell agreement. But a death itself would not automatically trigger a sale.
What if the land or the farm entity was inherited by several generations of off-farm heirs? That wouldn’t be a problem, Fruth said. “Why chase that capital investment out of the business?” asked Fruth. “As long as the on-farm operators were making all the management decisions, all the owners don’t have to be on the farm.”
IT CAN GET COMPLICATED
Fruth and his partners combine land-owning irrevocable trusts with multiple entities in the farm ownership structure to help them achieve their goal of keeping the farm operation together for the next generation.
One of the unfortunate aspects of commercial farming today is the business entity structure can get complicated. “When I started farming with my dad in 1977, it was just him and me on 800 acres,” explained Fruth. “But I realized in the 1990s that the industry was consolidating around me as I watched.” However, Fruth also knew he didn’t want to get overextended financially.
In 2000, Fruth joined forces with his neighbors Mark and Dennis Schwiebert. He expanded his popcorn acres and the Schwieberts consolidated their equipment lines. They eventually formed a general partnership to improve efficiency and productivity. A few years later, they joined forces with another area farm family, Rob Rettig and his father, Roland. Together they formed New Vision Farms. Rettig is the CEO and Fruth handles the financial management.
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The operating farm entity (New Vision Farms) is a general partnership because that allows the farm to comply with Farm Service Agency regulations and maintain as many payment limits as possible, explained Bill Penn, agricultural attorney in Midland, Michigan. “But the problem with general partnerships is each partner is personally liable for the business debts and liabilities of the partnership. Also, each partner is liable for the debts incurred by the actions of other partners. So, to protect the farm partners, each of the general partners is a limited liability company, owned individually by each farmer.”
Having multiple entities in a farm operation has tax and liability advantages, explained Paul Neiffer, CPA and principal with ClintonLarsonAllen. For farmers looking to transition their farm to the next generation, limited liability company shares or limited liability partnership interests are easier to gift or bequeath than a physical asset if there is more than one heir. Also, shares or interests qualify for discount valuations, which help lower an estate’s value.
Another advantage: Multiple partners and multiple entities may have made record-keeping a little more complicated, but Fruth said it also resulted in New Vision Farms stepping up its game. “We’ve gotten more professional in our management. We hired an agronomy/production manager, as well as an operations manager. We’ve become more efficient. And it’s given us more time to spend on outside interests,” explained Fruth.
“I don’t have all the answers,” he added. “Planning for a farm transition is an on-going process.” But you need to start: One of Fruth’s good friends who wanted to partner with New Vision Farms joined the group and then shortly afterwards was diagnosed with lymphoma. Within a year, he was gone.
It’s never too early to get a plan in place.
Editor’s note: DTN’s ongoing Senior Partners series examines the financial, legal and emotional hurdles families face as they transition farm ownership from the senior to the junior partners. For more in this series, go to https://www.dtnpf.com/…