January 19, 2023
One of the biggest challenges faced by many farm and ranch families is how to transfer the operation to the next generation.Many families put off making a will or trying to figure out an equitable transfer (especially when multiple heirs are involved) because they are not sure how to do it without creating hard feelings within the family and/or leaving someone paying a lot of tax.
Grant Snell, and attorney with Crowley-Fleck in Kalispell, Mont., advises clients in their estate plans and often says that “fair isn’t necessarily equal” with families that have several children.Some of the children may not be interested in carrying on the business; there may be one or more who stayed on the farm or ranch and the others have gone elsewhere and have other careers.
This can be difficult when trying to decide how to split the inheritance.“If the parents have assets apart from the farm, such as life insurance, this might help provide for the other children while giving the farm to the one who stayed home and worked.Having a conversation with the family early on is important, regarding what the plans are and what to expect.
Even if the plan is disappointing to a kid, he/she can deal with that with the parents while they are still alive, as opposed to having surprises after their death.I always encourage clients, whatever their plan is, to discuss and communicate with their children and be as transparent as possible because this can lead to fewer conflicts on down the road,” says Snell.
Using an entity for ownership of the farm, rather than a sole proprietorship can provide benefits.“We often use an LLC (Limited Liability Company) as an entity that would own the farm, and sometimes use multiple entities—one that owns the land and another that runs the operation.There can be tax benefits when we do that, to have the operational entity lease the farm land, even though the parents might still be the full owners of each entity,” he says.
Besides tax benefits, this can divide the management rights from the financial rights.
“With the LLC you can have different classes of membership, such as non-voting membership interests that would pass to the siblings outside the farm, at the parents’ deaths.This would carry with it some economic benefits but they wouldn’t be able to vote and make decisions--and outvote the ones who are actually running the farm.This is a way to divide things up so that the ones running won’t be impeded by the ones who are not familiar with it but you can still divide the economics,” he explains.
The operating agreements for the LLC or the trust can have different triggers for buyout.
“If the kids can agree amongst themselves and the ones on the farm want to buy out their siblings, you can build in preferential financing obligations.If the kids running the farm don’t want to get bank financing, this provides a way for them to purchase their siblings’ interests with seller financing options, with payments over time, that won’t impede cash flow as much (ability to run the farm),’ says Snell.
Sometimes land values become so high that it’s a tough option to try to buy out siblings even with seller financing.“Another option is for parents to make a lifetime gift of fractional interests of the entity.By giving a fractional interest in an LLC you get to leverage the gifting.Everyone gets a lifetime gift and an estate tax exemption.If you make a gift of more than $16,000 per year to someone, the amount over $16,000 will reduce the lifetime gift and estate tax exemption.This is something you can do with an entity like an LLC that you can’t do with a sole proprietorship,” he says.
He often has several meetings with the client because the various options can be overwhelming.We first put a will together, and things you can always change, then start layering on top of that—whether setting up an entity, or a revocable trust.These are flexible ways to deal with an estate.Having property in trust avoids it going through probate, which in some states is cumbersome.There are advantages to using a revocable trust,” he says.
It’s good to know your state laws regarding these things, and your advisors can also help you figure these out.“Usually the clients’ attorney, their CPA and financial advisor can work together to make a plan that’s in the family’s best interests.All three of those professionals need to know all the assets, how they are titled, and what the family’s plans are regarding succession,” says Snell.
Include the children
It’s also helpful to have the children at these meetings so they can understand what’s going on.“At the initial meeting it’s usually just the parents and I tell them it’s their property and their decision, but once they have determined a certain direction, they can bring the children in to let them know what the plan is, and make sure everyone understands it and is on the same page,” he says.
Some parents lease all or part of the farm to one or more children, with a plan of having them eventually buy it or gradually transition ownership to them.This can be a way to supplement their retirement income.
“Estate tax exemptions are very high right now and in 2023 will go up to nearly $13 million per person.But in 2026, if Congress doesn’t do anything, these exemptions will drop back down to around $6 million.We tell clients that if their entire estate is worth more than $13 million it makes sense to make some changes before 2026, such as doing lifetime gifts—either directly to kids, or into special trusts that can take advantage of the high exemption,” he says.
Real estate values have increased dramatically in the past few years, and with high estate tax exemptions, there are more people interested in making a big gift during their lifetime instead of waiting until they pass.“There are pros and cons in doing that.By making the lifetime gift, when the parents die, the kids are not going to get a step-up in basis.When you make a lifetime gift, the kids get your basis.The estate tax is 40% whereas the capital gains tax—which is what the step-up in basis would address—is only 15 to 20%.Professional advisors can crunch numbers for their clients and determine the best way to go.I have software that can run examples of different planning techniques so my clients can see how they work,” he says.
“One thing that many people overlook is doing power of attorney.This can be just as important as someone’s will and trust—to name someone to make decisions if you become incapacitated,” he says.
[Heather Smith Thomas is a beef producer and freelance writer in Salmon, Idaho.]
Read more about:Farm Succession
About the Author(s)
You May Also Like
How to feed dairy-beef crossbred calvesFeb 01, 2023
Unverferth adds Orthman Manufacturing to its lineFeb 02, 2023
Virtual lunch and learn sessions focus on sprayer prepJan 30, 2023
Almond industry seeks a new skipperJan 31, 2023
Nut growers take stock of damage after stormsJan 31, 2023
Almond pollination season on its wayJan 31, 2023
Hay supply near 50-year low, prices near record highsFeb 02, 2023