The value of farmland has increased significantly over the last couple of years across Minnesota and the rest of the upper Midwest. This increase in the value has a significant impact on farm succession plans and should be taken into consideration when these plans are evaluated.

With the increase in value, it is becoming more attractive to sell farmland. This is becoming especially true for families who had been holding the land as an investment. I am seeing an increase in sales by families who, in other circumstances, may not have been inclined to sell.

Couple of potential snags, solutions

A consequence I am finding with these sales are situations where a farmer who had been renting parcels of land from a family for many years is learning the land is no longer available to them for rent. This volatility in the availability of land has a significant impact on a farming operation. A way to address this situation is for renters to negotiate an option to purchase the land they are renting in the event the lessor chooses to sell it. These options can include terms for determining the sale price and payment terms.

Another place the increase in value is causing issues is in succession plans where a farming heir has the right to purchase real estate from the non-farming heirs. With the increase in land value, the purchase terms set forth in the plan may not allow the operation to cash-flow as expected. These purchase provisions should be reviewed on a regular basis to make sure the purchase will work for the farming heir.

An alternative I have found to be working for some families is to base the purchase price for the farmland on the Section 2032a value, which will be likely to more closely reflect the productive use value of the farmland versus the market or appraised value.

Finally with the increase in value of farmland, I am finding that more farms will potentially be affected by federal and state estate taxes. To address this, there is a greater need to make sure the succession plans: use the annual gift exemption amount (in 2023, you are able to gift $17,000 per person); maximize the use of the federal and state estate tax exemptions; set up the succession plan and farm operation in such a manner that allows for use of the special farm and business estate tax exemptions; use discount planning with family limited partnerships and limited liability companies; and use gift planning that splits assets between spouses.

Balzarini is an attorney at law with Hellmuth & Johnson PLLC. Contact him at [email protected].