News & Commentary

How Advisors Help Farmers Sow the Seeds of Future Growth

By: Cheryl Winokur Munk - BARRON'S

Conversations around soybeans, corn, and cattle don’t typically come up in the day-to-day lives of most financial advisors. But they are run-of-the-mill for advisors who work with farmers. 

Many financial professionals who develop this specialty as part of their business have a long-time connection to the farming industry. They may have grown up or worked on a farm, married into a farming family, or have friends in the business. They incorporate this familiarity into financial, retirement, estate planning, and succession planning advice.

“A lot of farmers are asset-rich, cash poor,” says Luke Keene, a partner with Leverty Financial Group in Hudson, Wis. “They have impressive balance sheets, but you can’t go write a check against an acre of land, necessarily,” says Keene, who is also the firm’s chief investment officer.

Below are several ways financial advisors are helping farmers sow seeds for the future:

Diversification. Keene, whose family has farmed for more than 100 years, encourages his clients to have regular savings outside of the farm so all their eggs aren’t in one basket. Many farmers have most of their wealth tied up in the farm, but that can be a risky move for multiple reasons, including the volatility of the farming business. 

Tom Palecek, founding partner of New York-based Summit Trail Advisors, works with several large family-owned farms to diversify their assets. Palecek, who works in the firm’s San Francisco office, helps farmers understand what should be invested in liquid or non-liquid investments, as appropriate. Farmers are often used to watching and waiting, many years sometimes, to reap the benefits of a crop, so investing a portion of their money in illiquid assets in exchange for a higher return is appealing to some, he says. 

Oftentimes, with farmers, investment management either doesn’t get done, or it gets done later in life, says Miguel Sosa, the founding partner of Premia Global Advisors in Coral Gables, Fla. It’s advisable, however, for farmers to seek financial planning help much earlier, he says, especially when it comes to understanding how they are going to live after they sell the farm or hand it off to their children.

Additionally, many farmers have a side business, a corporate career, or a spouse who works outside the farm, so there’s even more of a need for financial planning and investment advice, Keene says.

Retirement, tax and estate-related planning. Keene also encourages clients to set up a formal retirement plan so they don’t necessarily have to sell the farm, or rent it to non-family members, in order to retire. “It can be hard to convince farmers to think about the ‘someday’ of retirement, but advisors have to connect the dots between today and someday,” Keene says. “The younger you can create those habits, the better off they’ll be.”

Farmers are often surprised to find they are in a higher tax bracket after they retire, says Amber Knips, wealth advisor with Sweet Financial Partners in Fairmont, Minn., who works with corn, soybean, and cattle farmers. This happens because they lose many of the deductions that helped them over the years they were farming. To help ease the bite, she encourages clients to contribute, while they are working, to a Roth IRA or a solo 401(k) with a Roth option.

Knips, who is actively involved in her husband’s family-owned farm, also works closely with certified public accountants to help farmers with their charitable-planning needs and tax-mitigation strategies. She offers the example of a charitably-inclined farmer who invested some of the proceeds from machinery he sold within a donor-advised fund.

Jim Maher, chief executive and founder of Archford Capital Strategies in Swansea, Ill., helps farming clients navigate estate tax planning considerations. Maher, who grew up on a hog and cattle farm and is also an attorney and CPA, says he routinely helps farmers who are interested in gifting some of their assets to family members or trusts to minimize a future estate-tax hit. This is especially timely given provisions of the Tax Cuts and Jobs Act that are set to sunset in 2026.

Succession planning. In many cases, parents want to keep the farm in the family for future generations, Knips says. But their children or grandchildren may not be interested in that way of life. Since capital gains from a sale could be substantial, it’s important to find ways to mitigate taxes, such as through charitable giving, she says.

Even keeping the farm within the family requires proper planning. Children may not be able to afford to pay what the farm is really worth, so instead of selling it outright, parents may charge the younger generation rent in order to generate income in retirement. But it’s important to factor this into parents’ overall financial picture, since farm rent is typically paid once or twice a year, as opposed to monthly, Knips says. That’s where having other assets can help you bridge the gap between payments, she says. 

Family conflicts can also crop up over whether or not to sell the farm, especially if there are multiple children involved. For example, one sibling may feel it’s more financially feasible to sell the farm and invest the proceeds, while another could balk due to an emotional attachment.

Farm owners sometimes struggle over the concept of fair versus equal, Keene says. One child may have invested time, effort, and money into the family farm, but giving it to that child as an inheritance would not be an equal outcome for the other siblings. “There are several ways around this with proper planning but those decisions can be difficult for clients to make,” he says.

Maher urges clients not to make assumptions when it comes to the disposition of the family farm. He offers the example of one sister who mistakenly believed her brother wouldn’t want to sell the family farm. This wasn’t the case, and by talking about it, they were able to come to an agreement that mutually benefited both. 

Working things out amicably is especially important to Maher because his family went through seven years of litigation following his grandfather’s death, and it took 18 years to reconcile. “I spend a lot of time working on this family harmony piece because I know how big an issue it is for families when dealing with an illiquid asset such as a farm,” he says.

Link to article on Barron's: https://www.barrons.com/advisor/articles/financial-advisors-family-farms-51660244934

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