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 is in the farm,’” shares Donavon Wagner with Wagner Financial Services in Bismarck, N.D. “The issue with that is someday health issues happen, or they get old and can’t make it work on their own anymore.”
Wagner grew up on a farm and has more than 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.
The Equity Trap and Fair Transitions
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 a surviving spouse 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.
Leveraging Policies for Long-Term Care
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 4% of the death benefit per month to cover long-term care costs.
He explains, “4% of a million is $40,000 a month. And let’s just say after 30 days I die, all they would do then is they’d take that $40,000 off the death benefit. So instead of getting a million, my family would get $960,000.”
Retirement Accounts: SEPs vs. Roth IRAs
Additional financial tools that aid in transition planning include Simplified Employee Pension plans (SEP IRAs) and Roth IRAs to serve as dedicated retirement funds. SEPs allow individuals to contribute up to 25% of W-2 compensation (or approximately 20% of net self-employment earnings) up to $72,000 with a full tax deduction. This structure is favorable for larger operations in higher tax brackets. The caveat with SEPs is owners must also make proportional contributions for all eligible employees.
Roth IRAs are typically more favorable for small- to moderate-sized operators. Individuals can contribute up to $7,500 per year, or $8,600 if they are age 50 or older. Unlike traditional accounts, contributions are funded with post-tax dollars, meaning qualified withdrawals in retirement are completely tax-free.
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 59.5 and they’ve got to be in it at least five years.”
Health Savings Accounts and Next Steps
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 no 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.
