Estate and Business Planning for the Family Farm
Many family farms have been around for generations, but the art of farming has taken on many more disciplines than your grandparents or their parents had to deal with. These days, the average farmer must be conversant if not trained in business, commodities trading, statistics, engineering, genetics, economics, and other fields. Tax laws are still complicated, as are family dynamics. To be sure, not every family member wants to be a farmer.
At some point, you will want to retire, and your child or children may want to continue operating the farm. You may be relying on the family farm and its assets to provide a stable source of retirement income to you and your spouse. There may be children who will want to live and work elsewhere, and you will need to consider how they fit in the plan during your life, and upon your death.To achieve these ends, you will want to meet with your trusts and estates attorney to discuss your and your heirs’ goals and intentions regarding the farm. Your attorney will want a comprehensive accounting of the type of farming, the portion of the land essential for its operations, its value, income, and who the key players are, among other issues.
For family farms, here are some estate planning suggestions:Most farms are likely incorporated already as some form of business entity (e.g. corporation, LLC, limited partnership), but if not, discuss this with your attorney. An LLC provides protection from personal liability for accidents that occur on the farm as well as from creditors for obligations not personally guaranteed. To provide further liability protection, an LLC can be established for the operating business, and a separate LLC can be established for owning the real estate. If you own several farms, you may wish to segregate the ownership through multiple operating entities. Management of the LLC can pass to your children running the farm either upon your death or if you should become incapacitated, depending on the operating agreement and the succession plans you have put in place. This includes one for financial affairs and one for medical care in case of lifetime incapacity. You appoint a trusted family member such as your spouse or children to continue the farm operations without court intervention or creating family discord. You can also name a separate family member or friend to handle medical care decisions. A trust owns the farm assets but allows you as trustee to continue controlling the operations and how the farm assets are administered. At your death, a trustee that you have designated takes over the administration of the trust’s assets and distributes them to the beneficiaries. A trust avoids costly probate and allows the trustee to administer the assets in whatever manner you have directed. A trust will also preserve the family’s privacy.
You could also provide for the farm’s corporate stock or shares to be owned by the trust and then dealt with as gifts to the heirs under the trust at your death. Create a plan that allows the on-farm heir to inherit the farm and its assets after the death of the surviving spouse, or, if circumstances make this desirable, provides for the current farmer-client to make gifts to the children during his or her lifetime or upon the current farmer’s death. As a child may be putting a lot of time and effort into working on the farm (what we like to call, “sweat equity”), to make a transfer to children more affordable, a transfer often includes a buy-out component and a gifting component.
Each individual can make gifts of $14,000 per person, per year, which can reduce your tax liability, so gifting over time is often desirable. For example, a husband and wife can each gift $14,000 per year to a child, so together they can gift $28,000 annually to a child without the need for a gift tax return. If they wish to include a child’s spouse, they can also gift together $28,000 to the spouse. In other words, a husband and wife could transfer $56,000 to child and spouse in one year without requiring the filing of a gift tax return. Talk to your attorney about the most tax-efficient way to transfer your farm. As stated above, if you have children who do not wish to continue the family tradition or be involved in farming, you may wish to make other provisions for those children. We often discuss treating our children “equitable” rather than “equally”. Providing for them “equitably” depends on your unique situation. A child who is not contributing to the farm should not necessarily receive an equal share of the farm, as children working on the farm may well have contributed to the farm’s growth and stability that far surpasses a sibling’s contribution. You can plan for the on-farm heir to purchase the other siblings’ interest if desired or the off-farm heirs may receive rent, corporate shares, or a different asset, such as by naming a child as the beneficiary of a retirement account or life insurance policy.Should no one wish to continue farming, then its sale may be contemplated upon your retirement, incapacity, or death. You should plan early to ensure you receive maximum value in the event of a sale.
An alternative is for the non-farm heirs to have a procedure whereby they can hire professional managers or even rent the farm out. Even if children are not interested in the day-to-day operations, they may be able to hire trusted individuals to manage the farm while they pursue their own careers or receive income from renting the farm out.
There are other considerations based on the type of farming operations, the family goals and intentions regarding the farm, and how it is to be operated and managed in the future. Each farm and its culture and dynamics are unique and what may work or be recommended for one family farm may not be applicable or even appropriate for another. Contact Schloemer Law Firm for more information regarding farm succession planning.