Hyden, Miron & Foster, PLLC Law Blog

Friday, January 29, 2016

Estate Planning for Farm Owners

How can you ensure that farm succession occurs as you desire?

While it may seem that farming families have little need for estate planning, the opposite is true. For successful farms to survive for generations, careful planning is necessary. This message was broadcasted loud and clear at the American Farm Bureau Federation's Annual Convention and IDEA Trade Show this past December in Orlando, Florida.

 

Farmers were encouraged to begin planning not only for future growth, but to strategize about how the next generation will take over and manage their existing operations so that prosperity can be maintained. Contrary to the prevailing notion that farms persist under the ownership of one family for scores of years, only 30 percent of family-owned farms reach the next generation. This is often the result of poor planning combined with failed communication among family members. Families with farms should take serious note: a specific, solid, legally binding plan is necessary for inheritance of a farm to succeed.

As with all estate and succession plans, plans for farm continuance have to be individualized according to the specific circumstances involved. There are several things to be considered, including:

  • Are there children interested in taking over the farm?
  • Are there siblings who don't want to be involved in day-to-day operations?
  • Does the aging parent want to remain involved some of the time?
  • Does the parent want to maintain control? Have daily responsibilities?

    As with other inheritance issues, unless such matters are discussed and agreed upon before the owner's passing, it is likely that conflicts, or at least complications, will follow that event. There are several aspects that need to be gone over with a competent estate planning attorney, hopefully well before mortality is closing in. These issues include:

  • How ownership of the farm will be handled
  • How other assets will be divided among inheritors
  • How taxation will be minimized

 

Often, it is best to consider legal structures, such as trusts, to ensure a smooth transition. Farmers frequently use a type of trust known as an Intentionally Defective Irrevocable Trust. In spite of its odd name, this trust can be very helpful since it allows the parent to move assets from the estate, but remain a legal part of the operation of the entity. With such a structure in place, the farmer can continue to receive cash from the business while transferring it to inheritors.

In terms of minimizing tax liability, a number of strategies may be used. One is that farmers can use deferred payment contracts and prepaid expenses to manage their income taxes. Another is that farmers can pay wages, and make donations of commodities, to their children, so reducing tax liability.

It is well worth the time investment to work with an experienced estate planning attorney in advance of the necessity of dealing with end-of-life and inheritance issues. Professionals who understand the legalities involved in transferring assets and minimizing tax liability are certain to make the farm succession process go more smoothly and profitably. 


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