Last month we focused on enlisting help in farm transfer planning and discussed the need to plan early and often. Following up on that topic, an area of concern for many readers that’s often overlooked is the need to plan for and consider retirement. Perhaps a better phrase for farmers is “scaling back.” Many farmers never fully retire or quit, because they have been involved in the family farming operation for their entire lives.
However, aging is not something we can avoid, though we might like to. It’s important to consider both your specific retirement needs and the impact on the farm operation and potential successors. There are many legal issues to consider, and the winter months are a good time to hunker down and start the conversation with family and trusted advisers.
Rather than getting overwhelmed by the process, enlist the help of the professionals you work with, including your attorney, accountant, consultant, financial adviser and your banker. All these members of the “team” can help you implement your goals and strategies.
As an attorney, I often ask my clients for permission to discuss their goals, or meet with them and their financial and tax planner to discuss retirement goals and how they fit within the estate and succession planning goals.
Take a practical approach
Taking a practical approach to retirement planning is most helpful. Here is a list of questions and considerations you and your family may want to discuss to get the ball rolling on developing a plan to scale back:
Enlist help in calculating needed income in retirement. Often your financial adviser or other retirement or investment expert can assist you in a cost-effective way to calculate your retirement income needs
Consider health insurance and Medicare. According to a recent USDA-funded study, it has been reported that one of the most significant concerns facing U.S. farms is access to affordable health insurance. The cost of health insurance and availability of health insurance plans for farmers is a major area of risk management evaluation.
About 64% of U.S. farmers have pre-existing conditions, according to the study, and 52% are not confident they could pay for the cost of a major illness without going into debt. The solution is to plan ahead and set aside enough income to deal with the cost of major illnesses.
Assess your need for long-term care insurance. According to the USDA study referenced above, almost half of the farmers surveyed said they were concerned that they would have to sell some or all of their farm assets to pay for costs related to long-term health care (nursing or in-home).
A common question on this topic is: What is the best time to investigate purchasing a long-term care insurance policy? Many industry experts recommend starting a discussion with your insurance provider in your 40s or 50s. This is largely due to health concerns and cost
Remember, some companies now offer a rider on your life insurance policy to supplement your income later in life.
Decide on life insurance when healthy. As with long-term care policies, the most advantageous time to explore your options is when your health is good. With several “new” types of life insurance products marketed to farm families for the purpose of farm estate and succession planning, it’s helpful to address the topic of life insurance as a tool in the toolbox of retirement planning options.
Don’t forget tax considerations. As always, evaluating the options for retirement planning or a reduction in income means consulting your tax adviser. Many retired farmers remain landowners and receive cash rent from the younger generation. As has been discussed many times, there are actions retired farmers can take to avoid self-employment taxes.
Other items to contemplate
Why don’t we plan? Here are some of the common things I hear in my practice regarding why people don’t plan and some assumptions they make:
- It’s not easy to talk about death and the end of my working life, so we haven’t done it.
- We don’t talk about these things in my family.
- It’s overwhelming to plan for tax changes and different options available, so I haven’t done it.
- I will be gone or incapacitated, so why should I plan?
- My elderly parents have not planned, so I can’t plan.
What pushes people to plan for retirement? The most common response is: “I don’t want to burden my children or other family members.”
Read Retirement Planning for Farm Families for information and links to other helpful resources.
When you retire, where will you live? What is your long-range plan for your personal residence? Have you consulted with your financial adviser on the use of Roth IRAs or traditional IRAs as a retirement planning tool? Do you understand the income you will receive from Social Security? When is the best time to retire?
Remember, you are not alone. Succession planning and planning to “scale back” is a process that evolves over the years, and there are no family farm operations that are immune from it. Rest assured, there are many resources and advisers out there who can help facilitate this process. Don’t be afraid to ask questions and don’t wait.
Planning for year-end
Tis the season to consider charitable gifting. It’s never a bad time of year to consider incorporating charitable gifting into the family estate plan. Some farm families, especially those without an on-farm heir, often consider contributing gifts of real estate to charitable organizations.
Farmers also should investigate the charitable organizations before donating. It goes without saying that if farmers are looking into charitable gifting in the context of tax planning, they should make sure that the charitable entity they donate to is exempt from taxes in the eyes of the Internal Revenue Service.
As with other aspects of tax planning, good record keeping is key. Be sure to consult with your farm tax preparer, financial adviser or attorney to understand the tax impact of charitable gifts for purposes of year-end tax planning and estate planning.
Herbold-Swalwell is an attorney with Brick-Gentry in Des Moines. Contact firstname.lastname@example.org.