“Grandpa, are you rich?” the small child asked.

The farmer pondered and then replied: “I could have anything I set my heart on.”

As I heard this account, I responded, “Actually, you do.” The farmer and his grandchild were at a family gathering attended by all the farmer’s descendants. His family gets along. They share their parents’ faith. Their estate is mostly farmland, which they consider the best of all investments.

His statement struck me as reflecting an incredible truth. His is a close family, with a continuing faith, and the farmland provides a foundation of financial security. He is blessed, because he has what he set his heart on.

As a farmer, your estate itself is special. It’s something you set your heart on, probably many years ago, and that passion caused you to do what was necessary to have what you do. At the risk of diminishing the importance of family and faith, let’s consider the farm assets you have to pass on and some of the implications of each.

The most prominent asset you have is almost sacred. “This land has been in my family for three generations. My ancestors scratched out a living here, clearing rocks and stumps, and weathering droughts and storms. Then we worked hard to acquire a few more tracts, at great sacrifice. Our land is not for sale, now or ever!”

We tend to assume that our kids will feel the same way we do. Are their hearts set on the land like yours is? Should you “tie their hands” with detailed restrictions, forcing them to keep the land for multiple generations? Be careful. If you are overly restrictive, you may cause all of your beneficiaries to rebel against your plan and get together to find a way to break it. If you really want the land to stay in the family, first live to demonstrate your appreciation for it. Inspire your heirs to love it as you do. Then, place thoughtful options in your plan so those who value it most will have a reasonable opportunity to buy out those who may be less attached.

Thoughtful options
Should land be given equally to the children? Perhaps, especially if none of the children are farming. But even if one or two are farmers, you might want all of the children to share the benefit of land ownership. If an heir is depending on the opportunity to farm this land to make a living, make sure the other kids can’t force a sale out from under him or her. The key is to balance the economic interests of the nonfarming heirs (receiving some rental income) with the needs of the farmer (a share of the rental income plus the opportunity to actively earn a living).

Other assets are special in different ways, like equipment. It stirs your heart to drive your original, well-maintained 4020, and in a different way to operate the sophisticated new 8R Series. But plan for the transfer. If you give depreciated equipment to your kids while living, you have effectively given them an income-taxable gift. Instead, lease the equipment to your successor, and leave it to him or her on your death. The inheriting heir receives a stepped-up basis and can depreciate the equipment on his or her taxes. A tax deduction is much better than a taxable asset!

What of those taxes?
Your inventory might not touch your heart so much, but it has tax ramifications. Consider your grain, whether growing or in storage. If you convert it to cash, or you give the grain to someone else who does, income taxes are due on the grain proceeds. On the other hand, if you own grain at the time of your death (assuming it is not contracted), the sale of that will be tax-free income to your heirs. Grain is like a traditional IRA while you are living, but like a Roth IRA when someone inherits it.

No matter whether your goals are general or specific, trusts are your most flexible planning tool. Any instructions or restrictions are best enforced outside of the public eye by writing the details in trust. Even if you want the children to have total control of their inheritance, a beneficiary-controlled empowering trust can give them practical control while adding protection from a divorce, lawsuit, catastrophic illness and future estate taxes.

Love your farm? Pass it on with the same level of care that built it.

Ferguson owns The Estate Planning Center in Salem. Learn more at thefarmersestateplanningattorneys.com.