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Don't Step Over Quarters to Pick Up Nickels

Don't Step Over Quarters to Pick Up Nickels
Sometimes specific objectives, like saving on taxes, can conflict with major life goals like ensuring the long-term success of the farm business

I hate taxes. You hate taxes. Nobody likes to pay taxes. But that's not always a good enough reason for some of the decisions we make.

If you wait for appreciated assets to transfer as part of an estate, your heirs receive a step-up in cost basis so there is no capital gains tax due. Sounds pretty good. But it could be that the business has an offer from an outside buyer that is significantly higher than expected. The family might do better if you sold the business now and invested the proceeds.

But if you do that, you pay capital gains tax now. So what's the best path forward?

Sometimes specific objectives, like saving on taxes, can conflict with major life goals like insuring the long-term success of the farm business

In talking with clients about legacy planning, we always stress the big picture and ask them to consider what truly matters most when it's all said and done. We try to make sure that all their decisions serve the larger purpose.

For example:
In the long-term what do you want for the farm business?
Do you want it to grow?
Do you want it to remain at this location?
Do you want it to be owned by a blood relation?
Do you want it to employ more people in your community?
Do you want it to change the industry for the better?
Who do you want to control the farm business when you are gone?
Who do you want to legally own the farm business when you are gone?
Are there things you DO NOT want to happen when you are gone?

Consider one scenario
Let's say you've decided the best thing for the future of the farm business is for your youngest daughter to take over. She has worked in the business for the last 20 years. She has a passion for the operation and she has the skill to move the business forward. But, she is the youngest of four and her two older brothers have always thought she got favored treatment as the baby girl.

If you do nothing to prepare for this situation, it would be easy to see that the estate might have a conflict among the heirs and the estate could easily be forced to sell the family farm to pay out heirs. The operation ceases to exist and maybe there are some hard feelings among your kids. Your daughter moves to town and takes an office job.

One way to address these challenges and achieve the outcome you want would be to sell the farm operation outright to your daughter and use the proceeds to fund a retirement income for yourself and guarantee a specific inheritance for all the heirs. This makes it very clear that mom and dad want it this way. It gives everybody time to adjust to the new situation. It provides for continuation of the business and for an equal inheritance for each heir.

The sale may create capital gains tax that you need to pay, but it will clarify ownership. The succeeding owner is better positioned for success because they have clear title to the business and free rein to make decisions. By freeing cash to purchase paid up life insurance to provide a set amount of inheritance for each heir, the parents can fulfill a very specific, and important, goal for them by treating all the heirs equally in in terms of the amount of inheritance.

If this blog has got you thinking about your own situation, get in touch with my office ([email protected]). I am always happy to visit with folks working on their transition process.

The opinions of Rich Dunn are not necessarily those of Farm Futures or the Penton Farm Progress Group.

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