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Building Wealth for Your Children

by Linda Berry Walker

Farms provide a wonderful opportunity to create a family business, in which younger family members can learn important life lessons. Many parents and grandparents have successfully used farm chores and shows as a way of teaching the next generation how to be responsible. The care of animals and equipment, such as tack and machinery, instills a good work ethic in young family members. Breeding farms also provide an excellent way for you to teach the younger generation about saving as well as making money. I'd like to share some of the techniques I've used successfully with my son, starting when he was age 14. These techniques have also benefited young staff members, helping them create wealth of their own! I should quickly add that I am not a tax professional. You should check with your tax advisors to insure you correctly set up any program for transferring assets.

Start with the Basics

By the time you've created enough wealth and success to pass on to the younger generation, you've undoubtedly encountered a variety of financial advisors from pundits to prognosticators. You've probably developed a more complicated view of creating wealth than your young protégé will have an appetite for learning. Keeping it simple is the rule to follow here! Each young person differs in strengths with financing, so play to those strengths to get off to a successful start. One of the basic tenets of creating wealth begins with understanding how money compounds when you save it. It is particularly dramatic when you can show a young teenager how they can have a million dollars by age 62 if they start saving early.

However, saving is a hard concept to "sell" to this age group, when money is needed for everything from the newest style in clothes to after-market truck accessories. Part of the lesson for them to learn is to set aside money and leave it alone!. Some parents put a portion of their sons' or daughters' farm wages into an account which the parents manage and whose funds are unavailable to the young person. This does not really teach them how to manage money on their own, and I've found this method also does not engage the student or encourage an interest in creating wealth!

"Cria compounding"

The technique which has worked very well for me is to teach the benefits of compounding with crias. I call this "cria compounding." With current tax laws, as of January 1, 2007, which allow each person to make a $12,000 annual gift to another person, I got my son started successfully in the breeding business, gifting him a female whose value was that or less. He was able to watch his money compound with the birth of each subsequent cria. By the time some of the first crias are having their own crias, the compounding idea really starts to sink in! One of the added benefits of watching crias compound instead of cash is that it seems much easier for your protégé to leave the crias in the field than to leave cash in the bank.

Keep Good Records

As a widow I needed to maximize the annual gift amount per year. This would also be true for all other single parents. (Married couples can now gift $24,000 to an individual.) To maximize your gift, look to young crias or older dams that still have some good years of production, or set up half-ownership in an animal.
Do not undervalue your gift! For instance, if you recently purchased an animal for $20,000, do not gift that animal with a $12,000 gift value. I set up a file for each year's gift and document the value with auction results or the sale of other progeny from the same dam or sire. The gift value can be scrutinized by the IRS, and it is easier to document justification of the value at the time of the gift, rather than having to do so five years later. Be sure to create a duplicate file for your protégé and as time passes, help them keep it updated, tracking the "investment" and money made just as you would any other investment!

Gifting Males

Some years you may not have extra females to gift, either because it was an "all male" year or because you need every available female to sell to show a needed profit for the IRS. You are not obligated to make a gift annually once you start, but these years provide another great learning opportunity if you elect to continue the gift with a male. I've used several different options in years like this. Gifting a young cria with potential is a great way to keep your gift value lower and allow your protégé a chance to become actively involved in marketing and selling. Another option is to gift half-interest in a Junior Herdsire prospect you'd like to keep. Whether you ultimately elect to show and sell the male or stand him at stud, a portion of the proceeds can go to your young partner. Since your partner will be at a lesser tax bracket than you, your partner will be allowed to keep more of the profit than you would, thus teaching another valuable lesson in creating wealth: "It's not what you make, it's what you get to keep"!

Selling Strategies

When your protégé is ready to start selling for college tuition or their first condo, you'll want to explain that the sale of a raised cria less than one year of age is taxed as ordinary income, while the sale of raised animals older than one year is taxed at the long term capital gain rate. Although they may not be in a tax bracket that it will make a difference, it is a good tax planning exercise do with them. If they sell a group of crias at one time, it can make a difference, and you've had the opportunity to teach another lesson in creating wealth!

Again, be sure to consult with your tax advisors and follow all guidelines they recommend you follow. Some may ask you to set up a separate LLC for the child, while that does not seem to be necessary with co-owned animals.

For me, the camaraderie I developed with my son over the last twelve years of doing this has been priceless. Ultimately, it led to him saying he wanted to keep and take over the family farm, and so we are embarking on yet another new strategy for passing

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