* Editor’s Note: This is the second in a three-part series on machinery’s role in a farm succession plan.
Ensuring the seamless transition of big-ticket assets like machinery can be one of the biggest challenges when building a farm succession plan. Leasing is one way producers can overcome that challenge and best position both predecessor and successor for the continued efficient use and management of those assets.
When a producer leases machinery or equipment, he or she doesn’t “own” it on paper, a key factor when employing a lease as a transition tool, says Amy Weum, agricultural leasing specialist with AgDirect. This can make it easier to transfer that machinery to the next generation when the time comes.
“A leased asset doesn’t enter a producer’s estate immediately like an owned asset does because the leasing company legally owns it, not the producer. It can be easily transferred at the end of the lease, subject to specific contract terms,” Weum says. “If the next generation is taking over the operation, they can simply purchase the equipment at the end of the lease with the purchase option. For estate purposes, it’s not like outright ownership in which the senior generation has legal ownership and it has to go into the estate.”
Find The Right Terms
A major goal of any farm succession plan is to best position the next generation taking the reins of the operation, and that may change the goals of a machinery lease intended as part of that plan.
When leasing a tractor that’s not part of a succession plan, for example, a producer may seek lower payments and higher residual value for that machine at the end of the lease term. The opposite may be true when the lease is a vehicle to transfer machinery to a new operator.
“Some may want to have the lowest payment. But, they may have a fairly sizable purchase option and 50% or 60% residual remaining, and that’s going to be more cash out of the next party’s pocket when they go to pay it off,” Weum says. “As a succession tool, many seek to make higher payments and have a lower residual at the end of the lease, assuming they can cash-flow that payment. That minimizes the residual of the purchase option that next generation has to pay.
“We don’t want successors to be upside-down in equity. They want the lowest payment they can get, but it can’t be so low that they’re in a negative equity position if or when they go to trade at the end of the lease,” she adds.
Considering the myriad ways to structure a lease, using it as a farm succession tool takes a lot of planning, sometimes well ahead of when the transition begins and the lease is signed.
“Producers should be working hand-in-hand to come up with a financing structure that’s going to work for both parties. They don’t want to make the successor too cash-strapped starting out. If they’re in a situation where they’ve already started the process and know what the succession plan should be, that’s a good time to start talking about different structures that make sense,” Weum says. “For example, let’s say dad is getting ready to retire and his son is taking the operation over in five years. Dad leases a new combine on a five-year lease and at the end of that lease, there’s a 15% purchase option. Dad can sign that purchase option over to the son. Then, the son pays the leasing company that 15% and the bill of sale is cut to him. Dad’s completely out of the equation.”
Start The Conversation
More young and beginning farmers are starting to see the value of working together with the senior generation and using a machinery lease with a purchase option as part of a succession plan for both parties’ benefit, Weum says. While most plans like these today involve family members, she says that’s not a requirement.
“Younger farmers are starting to think about it more, and they might have to be the ones who bring the idea to the senior generation,” she adds. “Some may say ‘Hey, we know you’re getting ready to retire in the next few years, and we know we are going to have to replace or add some equipment. We can’t afford to do that all at once, so let’s set something up that makes sense for us both.’”
Are you building a farm succession plan and considering using leasing as part of that plan? Contact your local AgDirect Territory Manager to answer your leasing questions or start the process. https://www.agdirect.com/contact
Consult with a tax professional for advice on leasing options and tax issues.
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