Among the unique set of problems farmers encounter, estate and succession planning is often the most challenging. Determining when and how to transfer the farm is a long and not always straightforward process. This can include identifying the farm successor, making decisions about the growth of the farm, venturing into other agribusinesses, and articulating a vision for the future. While these tasks can seem daunting, having a plan in place is crucial to protecting the farm heritage and ensuring that the farm will pass to the next generation.
Farmers do not have to make these decisions alone. By putting together an "advisory team", farmers surround themselves with key advisors that will guide them through important decisions. Typically, this includes a tax advisor, a financial advisor, and a legal advisor. Often, lenders and other farm professionals are also involved. Through working with this team, farmers get advice from professionals that have helped hundreds of other farmers and farm families keep the farm in the family. In our practice, we regularly work as part of this team as we develop the succession plan.
We often hear that farmers don't know where to start when it comes to farm succession planning. We find that many times the best place to start is with the estate plan. By having sound estate planning documents in place, such as a will or trust, farmers can at the very least lay down a pathway for the farm successor to own the farm in the event the farm dies before the transition is completed. Through an effective estate plan, farmers can also minimize estate and transfer taxes. See our blog post on estate taxes here.
Once farmers have identified a farm successor and are ready to start transferring assets to him or her, we can get the succession plan underway. 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. See our blog post about properly maintaining LLCs, here.
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. Farmers should be especially careful when making ownership changes with farm land so they do not lose the agricultural homestead classification. A knowledgeable advisor should always be included in weighing these alternatives. See our blog post on Ag Homesteads here and here.
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.
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