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 Building
Wealth for your Children with Suri Llamas
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 simplicity
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 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 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 the 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 your partner may not be in a tax bracket that
it will make a difference, it is a good tax planning exercise
to add to the lesson. If your partner sells 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 to 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 business" 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 an asset from one generation to another!
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