The Missing Piece of Estate and Transition Planning
The interconnectedness of agriculture business and family relationships can make transition and estate planning feel challenging. Having the conversations and carrying out the legalities are two separate components that require great detail. Add on managing finances and what should be an exciting opportunity for the rising generation can quickly become overwhelming.
Jessica Groskopf – a Nebraska farmer and transition planning expert – talks about transition and estate planning in a different light. She recognizes the challenges that come with the process, but also sees the hidden opportunities that can help the rising generation build for the future.
“There is a big part of the message missing when it comes to talking about estate and transition planning. That part of the message is what we can do as the younger generation to prepare ourselves for that eventual transfer,” said Groskopf.
Jessica and her husband know firsthand what it is like to build for the future even when there has been a lack of transparency and communication from the senior generation. Together, they turned what looked like a less-than-ideal buy out to others into a great opportunity for themselves by using emergency funds, good debt, flexible investments, and alternative revenue.
Groskopf says, “Fifty percent of land owned by an operator was purchased from a non-relative.” That means the younger generation needs to start preparing financially because the likelihood of them purchasing property is very high.
Financial preparation can include many components. The Groskopfs knew they wanted to buy farmland at some point regardless of if it was in the family or not. So, they started early to prepare for their unknown scenario of a down payment for property. “The key to savings and investing is time. The younger you start saving and investing, the better off you will be especially if you are allowing that money to grow over a significant amount of time,” says Jessica. About five years after they began saving and investing, Jessica and her husband bought into the family partnership with the money they had accumulated. The amount of time, and money needed for a downpayment is unique to each individual person and family.
Emergency funds are the first step to financial security. “For most farm and ranch families, I prefer they have three to six months’ worth of family living expenses on hand,” says Jessica. Emergency funds are the safety net that families can use to safeguard against bad debt and continue to move forward financially. One smart practice with emergency funds is to make sure they are in an easily accessible account that earns interest . Two account examples to explore are high-yield savings accounts or money markets.
The next step is to tackle “bad” debt. Jessica says, “Not all debt is bad and debt is certainly not dumb. Debt is a tool…I think most people understand what bad debt is, but I want to provide a clear definition. Bad debt has a relatively high interest rate, usually over seven percent. Bad debt is also purchasing items that are not necessary.”
Other considerations to make about debt include depreciation, tax advantages and if the item putting you in debt is adding value in other areas of the business. It ultimately comes down to how you manage debt because even good debt can pile up and put farmers and ranchers in less-than-ideal financial positions.
Once you have an emergency fund, and have paid off “bad debt”, it’s time to focus on other savings and investments.
Jessica says, “ If the money will be needed within three years, it should go into the savings bucket.” High-yield savings accounts, money markets and bonds are all examples of accounts that can be used for shorter-term savings . Accounts used for savings should earn enough interest to outpace inflation, look for options with an annual percentage yield of 3% or higher.
Money that will not be needed in the short term should be invested. Investment accounts usually have higher rates of returns but require leaving the money in the accounts for long periods of time to receive the advantages of using them. For farmers and ranchers aiming to secure their financial future, Jessica recommends investing in flexible accounts. When picking an investment account, consider what tax and penalties may apply upon withdrawal of the funds along with any other stipulations that come along with the account. Once you have selected the account, you will then need to select the investments within the account. Producers should look for lost cost, diversified options such as Index Funds, Mutual Funds or Exchange Traded Funds.
“If your head is spinning when it comes to all this information, I’d encourage you to sit down with a financial advisor and explain your situation. Share how long you’d like to invest and how accessible you need the funds to be,” says Jessica.
Alternative revenue streams or town jobs are a common risk management strategy for farm and ranch families. Whether they pay for living expenses or even supplement the business during the beginning years, they can be a valuable tool. “I’m someone who says that it has to fit with the farm or the ranch. You have to make sure the seasonality of the business doesn't conflict with the farm or ranch and that you have the flexibility you need to get everything done,” says Jessica. Financial and non-financial considerations need to be made before committing to another form of revenue for your personal life or ranch.
Building for the future takes time and experience. Jessica says, “No one has taught any of us how to do this finance stuff…it is not something you should inherently know.” If you are starting from scratch, go back to your balance sheet. Write down what you do and don’t have in place and even what you don’t understand. Connect with an expert such as your local banker or a financial planner who can help you move forward.
If you are not comfortable investing on your own, work closely with a Certified Financial Planner (CFP®) professional, Certified Public Accountant, tax preparer, and/or investment advisor.
