Just because the farm is making money this year is no reason to put a scheduled retirement on hold, says farm consultant Tim Schaefer, Farm Futures blogger and co-founder at Encore Consultants, Morris, Minn.
Most farmers transition out of senior management over three to five years, regardless of market conditions. While COVID-19 may have slowed the planning process this year, most estate transfer specialists can continue that work through phone or email exchange.
“Farmers with heirs waiting to move into senior manager roles may be more inclined to begin their phase-out compared to farmers who don’t have someone waiting in the wings,” says Schaefer. “What I’ve learned from experience is that with a younger family member in line to take over, the senior manager might be more willing to get their name off the bank loan and start transitioning, even in their early 60s.”
A typical estate plan transition will see senior managers operate fewer and fewer acres over multiple years. That begins to limit both risk and expenses, but you can end up with an income problem because you can’t prepay as much expense as before.
“That’s why it’s a multi-year process,” explains Schaefer. “You’re giving away deductions at the same time income is fairly high. If you wait and pull the trigger all at once, it’s possible to have no money and yet owe taxes because you have to recapture depreciation.”
For example, you sell the grain in the bin or cattle in the lot. This generates income. At the same time you aren’t taking depreciation on new equipment and you aren’t expensing inputs. Income is high and expenses are low.
“That’s a double whammy,” says Schaefer. “If equipment is sold there is often depreciation recapture. In the current scenario with good current income prospects, you have real cash to work with.”
An election year brings changes to taxes and other laws. A good estate plan has the flexibility to address those changes. With the election behind us review how any proposed tax and law changes would affect your plan says Mark Balzarini, an attorney with Miller Legal Strategic Planning Centers, Tyler, Minn.
For example, currently the lifetime federal estate and gift tax exemption is $11.58 million for each individual. This is scheduled to sunset in 2026 back to $5 million indexed for inflation.
“There has been talk that this sunset could occur earlier if the law was changed by Congress,” says Balzarini. “This is something to watch. In the event it looks like estate tax changes are coming, it may be advisable change up your plan. An option for some may be to make gifts to use up the current exemption now rather than later.”