Broodmare Management – Henry & Associates

Broodmare Management Issues

Vaughn W. Henry

 The reproductive anatomy of the mare often predisposes female horses to be subfertile or even sterile. Owners and breeding farm managers should conduct a thorough pre-breeding exam in cooperation with their veterinary advisors and select out those individuals likely to cause grief. Note the scars and damage from previous foaling, look for poorly conformed labia and a forward tilt to the vulva and see if there is dried pus or other signs of infection. These mares tend to have problems conceiving due to the accumulation of fecal contamination or urine pooling in the vagina. This contamination and the associated pathogens are easily drawn into the vagina, and later into the cervix and uterus, when the mare is in heat and or when bred in less than ideal sanitary conditions. Besides physical contaminants, sometimes anatomical defects like poor labial tone or vulvo-vestibular closure causes mares to be “wind-suckers” and they will have a condition called pneumovagina. This condition of excessive air in the tract irritates the vagina and cervix, and sets up the mare for infections. A veterinary surgical procedure, a Caslick’s, often corrects this condition but the mare is somewhat harder to breed and the opening must be modified with an episiotomy prior to foaling or excessive tearing may occur during the foal’s birth. Generally, once a mare has had the procedure, it must be repeated every year.

On the accompanying illustration (taken from the Anatomy of Domestic Animals – 4^th Edition by Sisson and Grossman, W. B. Saunders Co.) note the location of the kidney (#13), the supporting broad ligament (#6), left ovary (#1), oviduct or Fallopian tube (#2), left uterine horn (#3), uterine body (#5), vagina (#7), labia (#8), bladder (#15), and the surrounding bony pelvic structure (#d, e, f). A thorough understanding of the mare’s anatomy allows the breeder more opportunity to overcome problems and raise healthy foals consistently.

Maintaining uterine health is important for continued fertility, as the subfertile mare lacks the resources to prevent opportunistic organisms from infecting her tract. Good management practices are essential for success.

Suggested Management

• Identify potential problem mares early, as it often takes six months or more to treat successfully. Use the autumn and winter as a period to isolate, medicate and improve the success rates of your barren mare herd.
• Eliminate parasite problems, adjust the mare’s plane of nutrition so she is neither carrying excessive weight nor extremely thin. Many managers like for mares to come out of the winter season in a weight gaining state to encourage improved cycling and fertility. This is called “flushing” and is a common technique in other farm species.
• The use of increased lighting regimes to simulate the approach of breeding season will accelerate the transition period in mares’ estrous cycles when they are exposed to 12 to 16 hours of light per day over a four to six week period in the early part of the season. There are sophisticated light meters which can measure the amount of effective light stimulating the mare’s pineal gland, but a good test in the field is the ability to read newspaper print in the stall or loafing shed. If it’s too dark to easily read the type, then there’s probably not enough light to adequately stimulate the mare’s reproductive system.
• If necessary, have a microbial culture of the cervix and uterine lining (endometrium) performed. A culture may be able to identify if a pathogen is causing problems and the results may suggest which antibiotic treatments, if any will be most effective. Some clinicians use a direct swab of the uterine lining, looking for the presence of excessive white blood cells. These cells, neutrophils, are the response to infectious agents in the tracts and can give the managers immediate feedback on whether or not the mare is infected.
• An endometrial biopsy (samples of the uterine lining microscopically examined) may be helpful in determining the extent of damage and likelihood of breeding success.
• Mares with poor conformation and a tendency to re-infect themselves may benefit from a Caslick’s procedure or a more involved episioplasty and reconstruction of the vulva.
• Pre-breeding sanitation, of both the mare’s and stallion’s genitals, is important if recontamination is to be avoided. Artificial insemination may reduce the number of organisms introduced into the tract by incorporating antibiotics in the semen extenders and reducing the trauma of breeding naturally.
• Artificial insemination and improved stallion management play an important part in this plan; so don’t neglect the stallion.

Older mares with a history of several foals often have broad ligaments(or see view #2 that have stretched excessively. The forward pull of the uterus over the brim of the pelvic floor and loss of uterine tone causes some mares to “pool” fluids and may contribute to poor uterine health.

“no one loves a barren mare” – horse owner lament

 The close cooperation among the breeding farm staff, veterinary consultants and owners is required if these marginally fertile mares with their compromised defense mechanisms are expected to breed, stay pregnant and deliver a healthy foal successfully. The alternative is to keep barren mares, pay the economic expense and for those mares that against all odds do become pregnant, produce healthy foals only rarely and sickly foals often.

Bad Trustees and Bad Decisions

Cleaning Up Loose Ends — a Tale of Two Farmers

 

Jeannie Evans inherited farm ground from her father, and she was exceptionally proud of its status as a centennial farm, one that had been under the same family’s management for over 100 years.  With no heirs other than a few nieces and nephews, Ms. Evans decided to leave her farm to the local university.  Not that giving farmland is a bad idea, but when Jeannie invited the alumni and development officers from the university out to see the farm, they indicated that it was foundation policy was to sell farmland if it did not fit into their management scheme.  After the development officers headed down the road to their next appointment, Ms. Evans hurried over to her lawyer’s office to redraft her will.  The new will’s provisions? 

§   The university cannot sell the land, even though the farm is too far from the research unit on the campus to be practical, and the acreage is too small to devote resources or staff to manage it.

§   The university has to continue using Jeannie’s long time tenant farmer and give him preferential lease rates, although the university had a professional farm manager and staff experienced in maximizing production. 

§   She leaves her nieces and nephews her portfolio of government savings bonds.  Unfortunately, the problem with inheriting bonds is that all of the accrued interest usually has an income tax liability that passes to the heirs.

 

In this case, Ms. Evans would be more tax efficient in her tax planning if she leaves the farmland, which steps up in basis at death, to her family and the taxable bonds to the tax-exempt university, which prefers cash for scholarships and endowment.  This solution allows her heirs the option of selling the farm without a capital gains tax, and the university receives the cash from the bonds without paying tax on what would otherwise be an IRD (income in respect of a decedent) asset.  Even with the gift in place and booked as a bequest, the university foundation should reconsider this gift.  With Jeannie’s new provisions, the university will be better off disclaiming a gift that has so many restrictions and avoid the grief of working with an uncooperative tenant farmer and an underperforming real estate asset.

 

The Right Stuff

Dave Janssen owns and operates an irrigated corn, soybean and wheat farm, and like many farmers, he lives poor, but is quite likely to die rich.  Dave is active on the town council, serves on the local school board, and would like to make a significant gift to the new school foundation.  Not comfortable with making a sizeable gift while he is still actively farming, a bequest in Dave’s estate plan seems to be the best solution.  In Dave’s role as a communitarian, this bequest would endow scholarships for students planning to return to the community as a teacher, health care provider or serve in a public service capacity. 

 

After reviewing the Janssen balance sheet and cash flow projections, the choice comes down to a gift of farmland or a gift of equipment and grain.  Whichmakes more sense?  In this case, the grain would be an IRD asset taxed at 35% in his estate, and the depreciated equipment is not something his non-farming heirs would be able to use or easily market.  His heirs would be better off if they inherited the land that steps up in basis at death, and then they can choose whether to sell it tax-free or operate it as a leased farm until other opportunities present themselves.  The tax-exempt foundation can take possession of the grain stored in the bins and have it sold through the local co-op elevator at market value without paying any income tax, and the equipment auctioned at a farm sale with the proceeds reinvested in the scholarship fund.

 

Achieve tax efficiency in charitable bequests more easily by inserting language in the will that specifies how to make gifts, and where to go in the estate to find the best assets.  Consider using something like the following as a guide.  “I instruct that all charitable gifts, bequests, and devises should be made, to the extent possible, from assets that constitute income in respect of a decedent, as that term is defined in the Internal Revenue Code.”

 

©2003 — Vaughn W. Henry

Will Your Family Business Survive to the Next Generation?

 

The wealth of theUnited Statesis often concentrated in family businesses, not the stock market, despite the occasional dire media warnings on slow news days.  The IRS now reports that there are nearly a million more S corporation (more often used in smaller businesses) tax returns filed than regular corporate returns, and the gap continues to widen annually.  Factor in the partnerships and sole proprietorships, and you find numerous entrepreneurs cranking out products and services that keep the economy rolling along.  Unfortunately, few closely held or family businesses have done any succession or disaster planning.  Vernon Rudolph, founder of the well-known Krispy Kreme doughnut franchise, died in 1973, but had no estate plan for his family.  As a result, Krispy Kreme had to be sold and Beatrice Foods eventually acquired the company in 1976, and its family influence was lost.  Even though Rudolph established his business inWinston-Salemin 1937, far from the stresses of big city concerns, he failed to create a plan that would preserve and protect his business interests for his family.

 

Why Do Family Businesses Fail?

 

Despite the posturing by politicians advocating “tax relief” and the elimination of the death tax, the reality is that by changing the rules and moving the goal posts so frequently, Congress has created a tax environment that results in taxpayer paralysis  Estate planning should be a thoughtful process designed to work over many years, but a sense of impermanence and capriciousness in tax laws fosters inaction.  While business owners acknowledge the risks of neglecting their transition problems, they doom their business to failure because they will not take the necessary steps to minimize the “easiest tax to avoid” with just a little planning.  Even if there is no federal estate tax concern, there will still be taxes on income and capital gains, and newly imposed state inheritance taxes to deal with.  However, the tax tail must not wag the dog.  Once the tax issues are addressed, it may be more important to find a way to pass down a value system and maintain continuity.  These are critical steps in the planning process, but too many advisors are not helping matters by ignoring the non-tax conflicts in their hurry to complete an estate plan and push their clients out the door with cookie cutter plans.  

 

The estate planning process can be confusing and highly technical, contributing to the 66% of family business that fail to make it to the second generation.  Try to pass the business on to the third generation and fewer than 14% make the grade.  (Keeping the Family Business Healthy,  John L. Ward, 1987).  Among many of the other reasons for such high failure rates is the “founder’s syndrome”, or the inability to let go.  For some owners with unhappy marriages, they have taken refuge in the business, while other owners dislike dealing with personally traumatic issues like mortality or disability.  All of this contributes to a revolving door of quasi-retirement for the founder who has little else in life other than work, and who keeps showing up at the office without relinquishing control of the reins. 

 

Many of the founder’s business interests are closely intertwined with their driven personalities.  This determination to succeed is the foundation for their many achievements, and the source of future conflicts.  Since control concerns are such a major part of their life’s work, acknowledging any loss of mental acuity or mortality is a real struggle.  Additionally, many founders have made some bad decisions along the way and they worry about disrupting family relationships in the process of getting the situation back under control.  How so?  They may have ignored some family members by favoring just a few select heirs, or minimized the advice from non-family key employees.  Too often, business founders put heirs on the payroll with no-show jobs or with limited responsibilities.  By setting family members up in executive roles for which they have little training or aptitude, the founder creates unrealistic expectations for heirs.  Add to the mix an heir who really works in the business and there will often be a festering sense of inequity where one heir is working and the other heirs are not; yet all draw a paycheck.

 

In the classic estate planning process, owners pass value down to heirs in the form of stock in corporations or partnership units in family entities.  The problem is that owners will not voluntarily give up control of a business in which they have invested a good part of their lives, and such workaholics will not accept the concept of a life in retirement or the need for a family forum in which a fair and open exchange of information is necessary.  For retirement to succeed, the energies and priorities of the founder have to be channeled into something other than work, but that is very hard when the founder fears becoming irrelevant and unappreciated by succeeding heirs.

 

Since the principals constantly interact with each other outside the business, family entities are often in turmoil because problems are brought home and the management stresses are not easily set aside. When children marry and have families of their own, the in-laws and third generation all want input.  Getting all the players to focus on problems and achieve a unified management system is a lot like herding cats, not an easy situation under the best of circumstances.  Besides conflicting goals, intergenerational conflict, and sibling rivalry, tension in the office is a foregone conclusion. Add to that volatile mix a history of poor communication and a failure to enact meaningful changes in management and frustration will build.  Thus, it should be no surprise that few businesses maintain operations far beyond the founder’s life. In addition, it should shock no one that the founder may be the worst teacher for heirs as he tries to integrate them into the family business—he has spent his life fixated on control, not on sharing information or techniques. Sometimes a non-family key employee or mentor can be a buffer and may be a better choice to interface between the generations to make sure everyone is prepared to assume his or her rightful place in the business.

 

Not all is lost.  Some families manage to make the business work down through the years.  The best example in theU.S.is the Zildjian Cymbal Co. of Norwell,Massachusetts  Founded in 1623 by an alchemist named Avedis I in Constantinople, and relocated to the Quincy, MA in 1929, this family business holds the U.S. record for continuity.  The founder discovered a metal alloy that created cymbals possessing special clarity.  The business continues 14 generations later under the direction of two of his female heirs, Craigie and Debbie, after almost 400 years of continuous operation focused on supplying their niche product to musicians around the world.

 

The Plan

 

Generally, for a succession plan to work, the main concerns about death, disability and retirement must be addressed early and often.  In the post 9/11 world, it would be terribly imprudent to ignore the potential for catastrophic loss of principal family members.  Therefore, create a plan that addresses these questions:

• How can institutional memory be enhanced and senior family members achieve a sense of validation.
• Who is going to own the business, and in what format?
• What steps must be taken to ensure continuity, and which advisors need to be brought into the transition team to make sure it happens? 
• Who is going to operate the business, make day-to-day decisions, pay bills, sign checks?
• Has the business buy-sell agreement been updated, and are realistic valuation techniques in place?
• Will there be adequate liquidity to continue to operate the business when the founder steps out of the picture and still provide for an equitable distribution of ownership interests?
• Will non-operating heirs be satisfied with reinvesting the profits back into the business to expand?  If not, managers face a shortsighted process of carving out value for income.  Or will heirs take the first good offer for the business and head to warm and gentle climates?
• Can the operating heirs buy out the others in a fair exchange of value for control? 
• Can all of this planning be done in a tax efficient manner without disrupting the business?
• If there is a family heir anointed as successor, does this person have a grasp on the business operation, its employees, suppliers, credit worthiness, and customers? 
• Do the heirs have the capacity and training to make decisions and keep the company moving forward with the full confidence of the other family members?  Alternatively, is there a key employee or outside manager available to hold the business together?

 

Most companies fail within a short time of their inception.  Family owned business have a tradition of being more durable, but it takes special care and a lot of extra effort to overcome these hurdles and succeed for the next generation.  Start the process early and preserve a lifetime of family work for the future.

 

Many of the charitable remainder trusts created during the high-flying 1990’s, especially those created prior to the imposition of the 10% remainder rule, have cratered along with the market decline.  For those with net income type trusts, the inability to find suitable income investments means that most of those trusts are now seriously underperforming.  What options exist for trustees and income beneficiaries with their trusts?  Depending on state law, the controlling language of the trust document, and the trustmaker’s charitable inclinations, there may be a few options.

 

1. Some charitable remainder trusts are created with a charitable organization as one of the income beneficiaries.  In this unusual case, this option to share the wealth exists as long as there is at least one tax paying entity receiving an income interest too.

 

2. For the trustee who no longer wants to deal with the hassle of a charitable trust, it may be possible to assign the income interest to charity, or terminate the trust entirely and accelerate the trust principal to charity now.  This gift generates another income tax deduction based on the present value of the income interests given away.  However, there may be state specific laws or spendthrift language in the trust document that would prevent the assignment of the beneficiaries’ income interest.

 

3. Make principal distributions from the charitable trust.  While there is no additional charitable income tax deduction, for the charitable client who wants to tap assets for current gifts, this may work if the document allows its use.  Otherwise, a letter ruling from the IRS may be necessary.

 

4. Seek court ordered termination of the trust and split the CRT into two portions, an actuarially calculated interest passing to the income beneficiary, and the remainder interest passing to charity.  There is no added income tax deduction, and the income beneficiary receives a zero basis capital asset to reinvest and use as needed. 

 

For example, Garth Books, 65 years old, created a NIMCRUT several years ago, but with declining bond rates, his trust produces less income than anticipated.  However, the stocks inside the trust have appreciated, so Garth finds himself with a more valuable trust, but is unable to distribute enough income.  His 8.5% income interest would not be prudent in today’s environment, but he selected the higher payout anticipating continued double-digit interest rates.  By cashing out the trust, Garth can reinvest the proceeds and use them to maintain his lifestyle.

 

5. Carrying the “split the blanket” philosophy one-step further, Private Letter Ruling 200152018 offers some insight into the IRS mindset about the sale of a CRT income interest in exchange for a more stable income through a charitable gift annuity.  While splitting the two interests will not generate a tax deduction, the subsequent exchange of a gift annuity for the income interest will generate a deduction, as would the purchase of any CGA.  The problem with basing any planning decisions on a private letter ruling is that it was issued to one taxpayer based on a specific fact pattern, and the IRS is under no obligation to act consistently.  You cannot rely on it as a precedent.  If you are contemplating doing something similar, seek your own letter ruling and be safe.

 

Charitable remainder trusts are irrevocable, but with suitable language tremendous flexibility in design and management is possible, and this is one significant reason to use a custom drafted document rather than an IRS prototype.  Consider the advantages of setting up the trust properly:

§   Donor and/or Trustmaker may serve as trustee for the CRT

§   Modify trustee or use a special independent trustee

§   Revoke or modify charitable remainder interests

§   Use revocable, multiple, or non-spousal income interests

§   Distribute of principal to charity before the trust terminates

§   Use multiple charitable remainder interests

§   Define “income” for fiduciary accounting purposes

§   Accept closely-held or illiquid assets

§   Accept testamentary contributions

§   Distribute assets in kind

§   Unbundle the trustee, investment, and administrative functions

§   Modify investment objectives to improve tax efficiency

  

Too Many Irons in the Fire – Malpractice XIII – Vaughn W. Henry

Including a DAF or Private Foundation in Your Planning – Henry & Associates

Checklists for Older Clients – Vaughn W. Henry

How donors should take charge of their priorities

Getting Your Advisors on Board – Why You Need Marching Orders for the Donor’s Advisors

Good stewardship starts with a clear plan and explicit directions

Despite the self-promoting press releases foundations and corporations generate with their giving programs, in most cases, the individual donor makes the real difference for a charity’s bottom line. According to Giving USA’s 2001 edition, 83.5% of charitable giving is from lifetime gifts and bequests from individuals.

As the population ages, more and more donors are looking for creative ways to arrange charitable gifts, and that brings us to planned giving. Why is that?  Planned gifts generally are made from capital assets, and not income.  Donors including philanthropy in their plans may use stock, land, or business interests very creatively instead of hard to find cash.  Besides helping out a deserving charity, there are tax benefits; the option for added income, and, best of all, donors need not be high-income wage earners to be tax efficient philanthropists.

Bequests and charitable trusts provide the bulk of new endowment funds; and exceptionally generous and motivated supporters make significant contributions possible.  However, no donor lives in a vacuum.  Most have a cadre of one or more professional advisors who provide them with tax, legal and financial advice.

Wise donors give because they are excited about a charity’s capacity to make the world a better place.  However, many early discussions about a proposed gift start with the charity’s fundraising staff rather than the donor’s trusted advisor.  Subsequent meetings with professional advisors, brought in later in the process, may steer the gift discussion off course.  Why does this happen?  Sometimes disinterested or inept advisors lack the technical background to understand the gift planning process, other times it revolves around miscommunication.  For all the good that a well-trained advisor can do for a donor, most of those who fail to follow through with a client’s charitable wishes do so because the client does not clearly and forcefully express his or her desires.  As a result, donors miss opportunities to support charities and projects that have drawn their attention or tugged at their heart.  And, it’s not just the charity that loses out; it is also the donor. Wonderfully creative gift arrangements can provide a sense of accomplishment and meet many of the donor’s goals too.

Commercial advisors often view their roles as one of protection and oversight, and too often do not understand or share their client’s interest in supporting a worthy nonprofit organization.  While various polls have reported that between 66 percent and 80 percent of all planned gifts are motivated by the professional advisors, unfortunately there are too many advisors responsible for derailing an untold number of needed and otherwise thoughtful gifts.

Last Updated: March 6, 2003

Gift & Estate Planning Services © 2003

CONTACT US FOR A FREE PRELIMINARY CASE STUDY FOR YOUR OWN CRT SCENARIO or try your own at Donor Direct. Please note — there’s more to estate and charitable planning than simply running calculations, but it does give you a chance to see how the calculations affect some of the design considerations. Which tools work best in which planning scenarios? Check with our office for solutions.

Overcome Financial Fears

	Financial goals must not be jeopardized
	by charitable strategies
	Acknowledge and address concerns
	about the donor’s financial security and
	any potential turmoil from concerned
	heirs before pursuing gifting programs
	The majority of donors would give more
	if they were in a position to do so
	Show them how to afford more gifting