Farming's way of life makes retirement planning a challenge

Missouri farmer Miles Cameron feeds some of his cattle with a bucket Tuesday afternoon in Luray, Mo. Cameron says he tries to feed with a bucket to get better acquainted with the livestock. (H-W Photo/Phil Carlson)
Posted: Mar. 8, 2014 7:30 pm Updated: Mar. 30, 2014 3:14 am

Herald-Whig Staff Writer

KAHOKA, Mo. -- Healthy, active and in his 70s, Jim Lorigan knows there will come a day when he can't do what he's done for most of his life -- farm.

So he and his wife, Hannelore, who live north of Kahoka, are making plans to transition the farming operation into their retirement years.

"We live on a family farm. We'd like to see this stay in the family," Lorigan said. "It's just time, as you get older, to think about what you want your family to have."

The Lorigans raise corn and soybeans with their son, Michael, and his wife, JoAnn, with daughter Deb Franklin and her husband, Gene, helping out from time to time.

"We're not ready to quit. Right now my health is pretty good, my wife's too, but you never know," Lorigan said. "As long as I can still climb up into a tractor or combine, I'll do it. Something about it gets into your blood."

That strong commitment to a way of making a living turns into a way of life for farmers, making retirement planning an even greater challenge.

"Retirement planning for farmers is different. They do it, just a little different in a lot of cases than what we call ‘nonfarmers' where they don't plan to work anymore," said Joe Koenen, University of Missouri Extension agricultural business specialist. "A lot of farmers still work."

However, farmers may cut back how much they work or what kind of work they do on the farm.

"Even though most farmers probably don't sell their land or maybe even their machinery before they pass on, a lot of them reach a point where they have to semiretire or partially retire because of health reasons," Koenen said. "At that point, they need to make plans for income for that retirement."

Income from farmland rented to family members or others could provide retirement funds. So could lease arrangements with livestock.

"Older individuals still want to own cattle, but they find a younger person that will help take care of the cattle, do the work in the winter, the calving they don't feel physically able to do, for a percentage," Koenen said. "When I started 34 years ago, there were lots of those things. In the '80s and '90s, there were none, and now in the last five years, there's been a lot more."

Early planning can avoid later problems.

"When you have a heart attack or stroke is not the time to make decisions," Koenen said. "The time to make decisions is before that."


Five-year plan

Bob Rhea with Farm Business Farm Management in Camp Point, Ill., suggests looking at a five-year plan.

"The first year or two of that might be the planning process, searching for the right ingredients to include in your plan, then maybe two to three years to actually implement the plan you have been creating over time," Rhea said.

The multiple-year approach is necessary.

"Most farmers are cash-basis taxpayers. That means they usually have a lot of contingent tax liability, meaning they build up deferred income taxes over time. A lot of them have a large tax cost to exit the industry," Rhea said. "A second issue is some specific asset to be dealt with -- inventory, machinery, farmland -- which is not always readily marketable. It takes time to find the right combination of management and labor to make those things work."

Nearing the age to be eligible for Social Security, having someone ready to take over the farm and even the recent economic situation with its strong incomes all can trigger a look at retirement, usually well after the age of 55 or 65.

"Farming is a pretty capital-intensive business. It just takes a while to pay off those debts people have accumulated over time, so usually retiring at age 55 isn't an option," Rhea said. Besides, "they've been doing something for 40 years and enjoy it. They don't mind continuing to do it while they're healthy and active. They can be well into their 70s before they say, ‘Now's the time to slow down.' "

The Lorigans already have a will outlining their wishes, and they took an estate planning workshop in January, sponsored by University of Missouri Extension.

"It seems like a lot of people are going into a trust," Lorigan said. "Our family always used a simpler means of transfer of property called a beneficiary deed. You don't have to go through probate with that. We'll probably go that route when the time comes."


Age doesn't matter

Miles Cameron's parents are at the stage of life to think about estate planning.

So is Cameron.

At 42, he works full-time at FCS Financial in Kahoka, farms part-time with his wife, Kami, northwest of Kahoka and helps his in-laws and parents on the farm.

"It doesn't really matter what age you are. If you've got assets, you need to be doing something to outline the direction of where you want those assets to go," Cameron said. "You want to still be prepared in case something happens even to a younger family. My wife and I have three kids, and when you look at it from that vantage point, it's kind of a good tool ... if heaven forbid, something happens to my wife and I."

While planning ahead is good advice for anyone, it's especially important in capital-intensive farming operations.

"Anymore now, it doesn't take very much land or equipment in a farm operation to talk about several thousands of dollars," Cameron said. "You definitely want to be prepared to pass that group of assets to the next generation while incurring the least amount of cost."

Cameron raises row crops and a few head of cattle on just over 300 acres. He and his wife have plans in place, including wills, and will update them as their kids -- ages 14, 10 and 7 -- grow up and make career choices of their own.

"Down the road, there may be some changes," Cameron said. "Just because you've got an estate plan set up, it doesn't mean it's taken care of and you're done with it. It's something you need to be thinking about on a yearly basis."

Rhea works with traditional retirement-age clients and with some from the next generation already looking ahead to the future.

"We're starting transition planning with people 24 to 35 years of age," Rhea said. "We often think about transition planning and how to help 60-year-olds get this done. The important piece is how to help these 30-year-olds get this done too."

The conversation is tailored to how to work with senior partners and how to build a partnership over time to buy out capital assets. It needs to involve both the people transitioning into the business and the retiring, or senior, members who will be transitioning out of the business.

"Quite a bit of time is spent on how do we make this thing work for the next 20 years," Rhea said. "The younger generation transitioning in have their own unique questions. They might be newly married, have a new family, have a spouse changing jobs and relocating. It's a lot of things for them to get rolling in their early career."


Transition and retirement

Farming provided "a good life" for the Lorigans, who met on a blind date while he was stationed at Fort Leonard Wood. They have been married for 54 years. They share title to the farm, which was transferred from his parents down to them. When one of them dies, the farm automatically goes to the remaining spouse to do as they choose for their lifetime.

"It's a good time, in my opinion, when a single party is left, to set up a beneficiary deed to pass it onto the people you want to," Lorigan said.

In making plans for his family's future, Cameron follows an example set by his parents. Allen and Loresa Cameron have a trust agreement in place for their farming operation.

"We as a family got together, discussed what seemed reasonable in everybody's eyes, and they proceeded to go ahead and get an estate plan done," Cameron said. "It feels awkward to go through something like that. It's very private information a lot of times, and you always are concerned about a lot of different things, but it's definitely something as a family unit you need to spend the time and do."

Developing a succession plan was important for the elder Camerons and their sons.

"My dad and my brother farm together on the family farm south of Kahoka. That's (my brother's) livelihood, his future. We don't want to put him in a position where he can't continue on with the farming operation," Cameron said.

Rhea drew a distinction between developing a farm transition plan and a retirement plan.

"They see the need to create a future vision for their business, and they want to do that while they're actively involved in their operation," he said. "Transition is a business-focused decision. A retirement plan focuses on the person in the operation and what they want to do long-term."

Often that involves realignment of operating assets and capital assets, which allows both the transition and retirement plans to be more flexible and successful.

The parents might place capital assets like machinery, farmland and buildings in an entity they own, then lease it back to a different operating entity responsible for management. The lease provides retirement income for the parents, while the next generation has a stronger stake in the farm's management.

"The first step is always to sit down with your spouse or significant other and talk about it. The farm is something you both put together, and it's something you both need to discuss," Koenen said. "Sometimes those are interesting discussions. You may not always agree on what should be done or have very different opinions on who ought to have what."

Advance planning pays off in smoother transitions and stronger family bonds.

"If you want to describe a difficult conversation, get involved with a family that has done no planning, made no arrangements and is not sure what will happen," Rhea said. "If they have a proactive plan led by senior members or partners, inclusive of all the key participants, it's a very positive and valuable experience for everyone."

For both generations, Rhea advocates the importance of developing a team to manage the transition.

"It's going to include an attorney, a banker, other business advisers, maybe somebody they respect who's maybe a farmer or maybe not who has done the same thing before or a vet, an agronomist who has been part of the business a long time and appreciates what some of their challenges are, their preferences are," Rhea said. "Relationships with people are probably more important than the financial planning."

Cameron sat in on an estate planning workshop four or five years ago, and again in January with his dad, gleaning some valuable tips.

"There's no one set way of handling this. That was the thing I got out of the class," he said. "Just because it works for one family doesn't mean it works for the majority of the families. You've got to do what's in your best interest and the best interest of the farming operation."






º Consider taking a class on estate or retirement planning to answer questions -- or learn what questions to ask. Classes can be a first step in the process or the final motivating factor.

"I see our job sometimes as just planting seeds," said Debby Whiston, family financial education specialist and county program director for University of Missouri Extension in Clark County. "People starting to think about it need to find out more information and may not conclude or start the process for three, four or five years. Sometimes people need to get this done, go to class and get it finished."

º Talk with everyone involved in the process.

"I know they can be tough conversations, but it's really important to say this is what we want," said Joe Koenen, University of Missouri Extension agricultural business specialist. "Not that that's going to prevent somebody being upset or problems after the fact, but everybody's on the same page knowing this is what they wanted."

º Extend the conversation beyond just family members.

"Like many businesses, farming isn't only about the money. It's about the people. Selecting good people to be part of your team and communicating with those who are affected by any transition is really important. That includes landlords, employees, bankers," said Bob Rhea with Farm Business Farm Management in Camp Point, Ill. "Be mindful of the decision and how those can affect unrelated but important farm employees."

º Aim for equitable division of assets.

"It's a fairly large business and a tough decision of what to do, especially if you've got individual family members interested in the business versus family members who want their share of the money now," Koenen said.

º Consider hiring professional help.

"It may be tough to find a lot of attorneys that have farm knowledge and farm background to work with," Koenen said. "The ones we find are very busy. They may be looking at a two- or three-year period before they get something accomplished."