Very often, successful farmers have been so focused on running the day-to-day operations of their farm that don’t take the time answer a very big question: “What if something happens to me, or the other shareholders in the farm corporation?” What happens to their shares on their death, disability or retirement? Who purchases those shares and at what price?
A family farm corporation with more than one shareholder should strongly consider establishing an agreement in the case of death, disability or retirement of one of the shareholders. This is called a “buy-sell agreement,” and it allows for a smooth transfer of shares or other farming assets from a departing or disabled shareholder to the remaining owners of the family farm corporation. One of the main purposes of a buy-sell agreement is to set out how the transaction should take place without jeopardizing the financial well-being of the departing, or disabled owner and his or her family. It also protects the financial health of the family farm corporation.
There a three common elements that need to be discussed with your tax and legal advisors:
A triggering event (such as death, disability, retirement or third party offer to purchase)
A fixed price or valuation method for how the price of the assets or share will be determined
How the financing will take place for the party purchasing the assets or shares