Transitioning the Family Farm: An Overview of Strategies
In Southeastern Minnesota, family farms are not just the land, business, or way of life, but a direct link to the heritage and history of several generations. Ensuring the farm operation will be there for the next generation is often a top priority. The actual process of transitioning the farm begins many years before the change in ownership. Planning ahead can make the transition a smooth one.
There are a number of strategies that retiring farmers can use to pass the farm down to the next generation. A simple way is for the younger farmer to begin purchasing new machinery as the older machinery needs replacement. This gradually moves some of the operating assets of the farm from the retiring farmer to the younger farmer.
Another approach would be to use a limited liability entity, such as an LLC, to hold operating assets like machinery and livestock. The retiring farmer can then gift, sell, or bequeath ownership interests in the LLC to the younger farmer to steadily transition ownership of the assets. This strategy can be especially effective for newer, more expensive machinery and livestock operations since it eliminates the need to deal with specific assets. However, the new entity will require its own checking account, tax ID number, and tax return, so careful planning and consultation with trusted advisers should always go into this decision.
Land may or may not be in another entity, depending on the particular situation. Many times it makes more sense to keep land out of a business entity for tax or other practical reasons, though a family limited partnership can be a good choice sometimes. Like an LLC, a family limited partnership can allow for incremental ownership changes. Family limited partnerships can also be a good tool for managing ownership by several different family members. It might also make sense to put the land into a trust for estate planning reasons. Given the risk of increasing real estate taxes or losing the valuable family farm land estate tax deduction, a knowledgeable adviser should always be included in weighing these alternatives.
While tax and legal advisers can be extremely useful to the planning process, successful transition of the farm also depends on cooperation and good communication between the retiring farmer and the younger farmer. At the end of the day, both careful planning and good communication will better equip the next generation for continuing the legacy.