Accumulating and Unlocking Wealth

Over the years, many in the baby boomer and older generations have accumulated a lot of wealth. Many of these folks grew up in less than prosperous economic times, and as a result are rather conservative in their lifestyles and spending habits. Most wealth is dictated less by how much you make and more by your spending and saving habits.

No doubt, much of this accumulated wealth is the result of hard work and prudent financial habits. But for many – especially in agriculture – much of the current wealth has been made from asset appreciation, particularly skyrocketing land values. Often, people don’t even realize the extent of their own wealth, since it doesn’t show up in bank accounts or investment and stock market statements.

Yet because of the more challenging economic times they grew up in, many also aren’t inclined to “unlock” some of their wealth to enjoy a more opulent lifestyle. Old habits – even financial ones – can be hard to change.

Conversely, many in the succeeding generations grew up in more prosperous times. They will likely inherit much of this “locked” wealth – benefiting from the previous generation’s sacrifice – and many will undoubtedly unlock it. Some will invest wisely … and others won’t.

In today’s economic environment, it may be more difficult for some to accumulate wealth. Additionally, lifestyles are different, and the cost of living, social demands and expectations are higher and more expensive.

That said, there are many relatively young farmers who’ve taken advantage of the same asset appreciation phenomenon as the older generation. The difference is many have taken the long view and invested wisely in the stock market or commercial real estate instead of farmland.

The one large item typically missing from most financial statements is deferred tax liability. This is the tax bill you would likely owe if there were events that triggered or forced you to sell assets that have appreciated in value. In 2008, the deferred tax liability was estimated to be about 27% of net worth. In 2021, it was estimated to be down to 23% of net worth.

For many, the deferred tax issue is a nonissue. Prudent estate and succession planning can usually minimize the liability.

-- by Lynn Paulson, Bell Bank Director of Agribusiness Development