It’s easy to pour everything back into the ranch, but that strategy can unintentionally break the legacy if life deals an unexpected card and transition plans aren’t strategic.
“Almost everyone, says, ‘Well my equity's in the farm.’ shares Donavon Wagner. “The issue with that is someday health issues happen or they get old and they can’t make it work on their own anymore.”
Wagner grew up on a farm and has over 40 years of experience as a financial advisor. His experiences allow him to help other farmers, ranchers and business owners build financial strategies unique to their operations, lifestyles and goals.
Transition planning is a key topic Wagner is passionate about. There are a variety of tools to take care of yourself, spouses, on-farm children and off-farm children in a fair manner.
He says, “They [the senior generation] have to pass this on to them [the rising generation] so they can afford to take it over. And there's a lot of ways of doing that.”
One of the first tools Wagner highlights is life insurance. Life insurance policies can be used to take care of spouses or provide a fair share to off-farm children which simplifies transition planning for the on-farm children.
“As much as I hate paying life insurance and as much as I hate writing it, what a great asset because when that's paid out, it's federally tax-free,” explains Wagner.
Another almost hidden opportunity with life insurance is to use it in place of a long-term care policy. When written properly, families can receive up to four percent of the death benefit per month to cover long-term care costs.
He shares, “Four percent of a million is twenty thousand a month. And let's just say after 30 days I die, all they would do then is they'd take that twenty thousand off the death benefit. So instead of getting a million, my family would get $980,000.”
Additional financial tools that aid in transition planning include simplified pension plans (SEPs) and Roth IRAs to serve as retirement funds. SEPs allow individuals to put in 25% of their income up to $72,000 with a straight deduction. This is favorable for larger operations in higher tax brackets. The caveat with SEPs is owners must also do the same for their employees.
Roth IRAs are typically more favorable for small to moderate sized operators. Depending on the year individuals can put in around $7,600 per year or $8,600 if they are 50 or older. They are taxed on what’s put into the account instead of what they take out.
Wagner says, “This is a way of having some tax-free money down the road, as long as they leave it in there until they're fifty-nine and a half and they've got to be in it at least five years.”
Outside of transition planning and retirement planning, health savings accounts (HSAs) are another investment strategy to consider.
“The nice thing about that is you can take that deduction and use these dollars for dental, chiropractic or other health care. It’s all deductible,” explains Wagner.
Before making any financial investment decisions, Wagner stresses the importance of making sure the plan and financial advisor are the best fit for your goals as individuals and a business. Know what their experience level is and ask about fees.
He says, “There's no one way for every single person. Everybody is different.”
Additionally, action must be taken. These opportunities can be discussed to end but don’t work unless plans are put into motion.
“We can have intentions, but if we don't follow up on it, it doesn't happen,” says Wagner.
Listen to the full conversation on the Cattle Conversations podcast.
