Estate planning and succession planning are two steps to one goal

Succession and estate planning are two different tasks, and both are equally important in passing on the farm.

May 11, 2015

6 Min Read
Estate planning and succession planning are two steps to one goal

Estate planning is the transfer of assets with one clear goal: Don’t pay one penny more in taxes than you legally have to. It’s all about the money.

Meanwhile, succession planning is about the continuation of family leadership in a business.

Those are two very different steps, Rick LaPlante, a business leadership consultant, recently told a South Dakota/Wyoming Farm Bureau joint Young Farmers and Ranchers conference. LaPlante illustrated that two-step process of transitioning a farming or ranching business to the next generation by detailing a case study on a Montana farming and ranching operation.

This Montana operation consisted of:

  • 200,000 leased and deeded acres

  • 5,000 cows and 2,000 replacement heifers

  • foundation Quarter Horse operation

  • six to 10 family employees and 15 to 20 additional employees during peak times of the year

“This ranch started in the 1940s when John shipped 800 head of cattle to Montana, arriving just in time for the worst winter on record. He lost almost all of them, but the operation survived, and the rest is history. He and his wife became the classic patriarchal ranching family, raising two sons and two daughters on the ranch,” LaPlante explains.

John took a very progressive estate-planning approach, hiring the best experts to begin the process of transferring ownership through annual gifts to each of his children. Over a decade, 45% of the operation was transferred to his four children.

“Then, in 2007, John faced serious health issues that forced him to step away from the business. His strong estate planning allowed the next generation to buy out his remaining ownership interest in the business. This resulted in each child owning 25% of the operation, and being named a co-CEO of the business,” LaPlante says.

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The success of the ranch over the decades was predicated on the excellent business and operational skills of the family. John had efficiently transferred his assets to the next generation but had done little in succession planning, which is the process of transferring leadership skills and critical decision-making capabilities to the next generation.

So, upon purchasing the remaining interest, the four children faced chaos as they suddenly took over the reins.

“The girls had been told that if they wanted any meaningful leadership role on a ranch, they should marry a rancher. Instead, both opted for careers and families off the ranch. They’d both been off the operation for 30 years when they became co-CEOs.”

Meanwhile, one son operated the ranch’s farming enterprise of nearly 20,000 acres of dryland cropland. The other son was still running the cattle under his father’s ever-present watch at 50 years old.

“Each sibling had 25% control but, based on the bylaws, could not give any of that control to other siblings. They were stuck, and had no idea what to do,” LaPlante says.

Making necessary changes

Operationally, the siblings did know a few things: how to raise a good calf, how to raise a lot of calves, how to market them and how to keep costs down. LaPlante says, fortunately, the brothers were good enough at these tasks to not completely break the ranch during the chaos of the initial years as co-owners.

“When we met in 2008, they were looking at their bank account in December to see if they made money for the year, and a family friend and bookkeeper used Quickbooks for their accounting, with zero enterprise accounting. I just knew this was not going to end well if major changes weren’t made,” he says.

That’s where LaPlante stepped in. As is so often the case, LaPlante notes, “What we accomplished together over the next six years is what should have been done in the six years before John stepped aside. Succession should be planned, not left to the inheriting generation to react to the, ‘Oh, hell, what just happened?’ situation.”

The group began working together to reach a solution. Each business meeting began with the question: Why are we doing this?

“These four people had control for the first time, and they were ages 55 and up. Asking that question made them think beyond the ‘because’ and really consider what they, in their capacity of control, wanted the ranch to do for their generation and those to follow,” LaPlante says.

The result was mission and vision statements that clearly defined the goals of each individual and the operation as a whole. These have formed the framework for all decision-making to this day, he adds.

“We then took that vision and mission and made some very tough financial decisions over the next five years. They chose to stop farming because, after hiring a CFO and adopting a new financial system, they learned they were even better cattle ranchers than they thought and substantially worse famers,” explains LaPlante.

They also realized that, upon gaining complete control of the operation, the siblings were legally able to change the bylaws that previously had prevented them from gifting or selling shares to each other. This set into motion a variety of changes within the operation’s structure, as the siblings both altered control within their generation and began transitioning shares to their children.

“All this work we did made a difference. Today, revenue is booming beyond what they could have imagined six years ago based on important, but difficult, decisions the Generation 2 leaders made,” LaPlante says.

The siblings divided the business into multiple companies, and a 27-year-old member of the third generation currently sits as CEO of the land company. He’s not sure he wants to remain CEO much longer, as he’s learned it’s a lot of thankless work to implement the wishes of the broader board. Yet, that’s exactly the experience the next generation of leaders need, LaPlante says.

One of the most critical lessons learned is that when complete control is inherited or purchased, there is then the ability to stop and start the process over if needed.

“If you’re stuck with something your parents gave you because they had a very strong opinion about what should be done, when your generation is the 100% shareholder, you can throw that out and start over. That is what happened in this instance. All of a sudden, the dam broke and Generation 2 changed things. Generation 3 started inheriting control and coming to business meetings, and the entire dynamic of this operation changed for the better,” LaPlante says.

Heather Maude is a freelance writer and rancher based in Caputa, S.D.

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