According to Anita B. Stone – Farm Estate Planning is necessary when passing a farm on to the next generation. The U.S. Department of Agriculture National Startups Service reports that family-owned farms account for 97% of the 2.1 million farms in the United States.
Farming for most families is more than a means of livelihood; it is a desire to pass down the land and assets to heirs.
But this plan faces many challenges to successfully survive a shift from one generation to the next, a transition that researchers find only 30% of farms survive with the second generation and 12% still operate with the third generation.
The reason survival rates are low is largely due to the lack of a plan and the results usually end in disaster. The farm ends up being sold and converted into non-agricultural use, cutting the legacy short and ending any hope of continuation within the family.
Farm Estate Planning and Transition for Farmers
To successfully keep the farm in the hands of the family or transfer the farm, before retirement or death, farmers can use several methods of planning, the most common are estate planning or transition planning.
What is Estate Planning? This type of plan is defined as a plan written before the death of the owner and is implemented only after the death of the owner. The plan must be flexible and protected from attacks by creditors and predators, including tax and regulatory entities.
Any estate plan needs to be carefully designed by a trained agricultural attorney, a person who knows the complexities of farming
Three major mistakes often occur when handling agricultural estate planning needs. The first error is failing to form a plan.
The question becomes, “Who should inherit the farm and the farm assets?” Trying to keep things fair and equal is a difficult decision when it involves farmland, livestock, and other assets.
Because of indecision, and because sometimes it is too complicated, the plan is put aside and when the owner dies, there is no estate plan at all, leaving a court to decide how the assets are to be divided among the heirs.
Secondly, when joint ownership is involved, many complex issues arise which may result in giving up control of any real estate. Joint ownership may also be difficult to change since “undoing” joint ownership can be highly expensive along with complex tax implications.
Holding real estate in the name of a partnership, corporation, or trust is a better option to minimize liability and retain control.
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The third error is not planning for cash needs. Incapacity and death often require immediate liquidity to pay expenses, so you need to plan for long-term needs. Farmland, farm equipment, personal residences, automobiles, and other personal effects are not immediately liquid.
Without planning for long-term cash needs, families may be forced to quickly sell land and equipment for pennies on the dollar.
Another type of legal plan is known as a transition plan. This plan may be used if you want to transfer a farm operation to the next generation and requires three factors.
First, there must be a transfer of ownership, within the transition plan, of assets such as land, equipment, and ownership of the business itself. Second, there must be a transfer of control over assets.
If the ownership of assets is held by a corporation or limited liability company, they may wish to have a say in farm management decisions.
Third, there may be a desire to allow participation in the revenues of the farm business by whoever may or may not have an ownership stake, such as a partner or family member. Transfer strategies are important.
Transfer issues may cause conflict and should be addressed in any plan. To transfer a farm from one generation to another requires legal assistance. To transfer the “business,” the first step is to build a management team. “Team” is the keyword.
Many decisions and transactions need to be team decisions. Decisions made by the owner should focus on improving the management skills of any heir.
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Transition management offers farmers the option to use a wide range of “tools.” Major tools include wills, trusts, life insurance, and “transfer-on-death” deeds.
A will is a well-known document and is usually named a power of attorney or an executor to carry out the written requests.
A will allows you to communicate instructions and strategies to your executors so that your wishes are realized. Will only become effective upon death. You can revoke or change a will any time before death.
Life insurance is often overlooked but it can offer flexibility as a means of providing support to a surviving spouse with dependents.
An appropriate amount of life insurance can also pay estate expenses such as burial costs and taxes. Proceeds can also be used to purchase the interests of any children and the proceeds are not required to go through probate.
A transfer-on-death deed (TODD) is popular because the owner designates one or more persons as beneficiaries. The beneficiary automatically becomes the owner of the property when the current owner dies. This deed has the flexibility of a will.
If a trust is chosen, this tool can be flexible, especially a revocable living trust and needs not to pass through probate. Trusts also provide public disclosure but can become frozen and involve up-front costs.
Several other tools should be considered when doing your farm estate planning. A farm attorney can inform the farmer of other available entities and changes in the legal system.
For example, corporations have been with us for centuries and limited liability companies have been with us for decades. Newer forms, including limited liability partnerships, have emerged, proving to be a flexible tool for farmers, looking to give some heirs greater control over operating decisions while still allowing other heirs to participate in the revenues.
In summary, given several choices listed and other opportunities for farmers to control their land and assets, farmers can select from a multitude of options.
In farm estate planning, the key is to take the time to check all possibilities, both pro and con, although daunting and numerous, and decide on a plan that will protect the homesteading land, the assets, and the heirs; hopefully, keeping the farm running for generations in the hands of the family and making sure every aspect of the farm business is protected.
What steps have you taken in the farm estate planning process? We would love to hear your comments below.