Peterson, Devin Richard (2013-12). Financial Implications of Intergenerational Farm Transfers. Master's Thesis. Thesis uri icon

abstract

  • This study seeks to address the challenge of family farm succession. A recursive, stochastic, simulation model is employed to estimate the financial impacts and accompanying risk incurred through the intergenerational transfer of farm assets and management. The model assists in creating a before and after comparative analysis of succession for a large, medium, and small sized representative farm in Texas. Eight methods of farm transfer are analyzed: a will, trust, buy-sell and lease-to-buy agreements, the formation of business entities, life insurance, gifting, and selling farmland to outside investors. These methods are employed to help minimize estate taxes, create retirement income for the owner, or decrease general transfer costs such as probate fees. The simulation model utilizes stochastic and control variables to create pro -forma financial statements that aid in determining net income, debt requirements, and debt outstanding each year for a ten year time period. Key output variables such as combined net present value (NPV) of the owner and successor and the debt to asset ratio are used to analyze financial performance and position. Combined NPV is also employed to rank risky alternatives from most to least preferred using the method of stochastic efficiency with respect to a function. Output variables of estate and gift taxes and debt capital volume are also examined to compare across methods of transfer and to view their effects upon NPV, debt levels, and cash flows. The study finds that the most preferred method varies by farm size, net worth, and the underlying goals of the farmer.
  • This study seeks to address the challenge of family farm succession. A recursive, stochastic, simulation model is employed to estimate the financial impacts and accompanying risk incurred through the intergenerational transfer of farm assets and management. The model assists in creating a before and after comparative analysis of succession for a large, medium, and small sized representative farm in Texas. Eight methods of farm transfer are analyzed: a will, trust, buy-sell and lease-to-buy agreements, the formation of business entities, life insurance, gifting, and selling farmland to outside investors. These methods are employed to help minimize estate taxes, create retirement income for the owner, or decrease general transfer costs such as probate fees.

    The simulation model utilizes stochastic and control variables to create pro -forma financial statements that aid in determining net income, debt requirements, and debt outstanding each year for a ten year time period. Key output variables such as combined net present value (NPV) of the owner and successor and the debt to asset ratio are used to analyze financial performance and position. Combined NPV is also employed to rank risky alternatives from most to least preferred using the method of stochastic efficiency with respect to a function. Output variables of estate and gift taxes and debt capital volume are also examined to compare across methods of transfer and to view their effects upon NPV, debt levels, and cash flows. The study finds that the most preferred method varies by farm size, net worth, and the underlying goals of the farmer.

ETD Chair

publication date

  • December 2013