November 2011 Archive for Farm Estate and Succession Planning

Often I work with farming entities: partnerships, corporations, LLC’s. Other times I work with individual farmers who work “together” with another individual farmer, sharing many expenses and profits, along with machinery and equipment. In all of these situations I am a strong advocate for the need of a “buy-sell agreement.”

 

A buy-sell agreement deals with what happens in the event of death, disability or departure. Nothing has happened to any of the ‘main players’ now, but what if something does? Think of it as being proactive, and having a clear, fair way to handle any of the above referenced situations. 

 

One area to look at when designing these is what happens at death. If a co-owner of a farming entity passes away, many questions would be immediately asked, both by the surviving co-owners and the heirs of the deceased co-owner. Some of them would be easy to figure out. For example, the grain would be split based on the ownership shares, along with the expenses and liabilities. The machinery is often the difficult question. In the case of a death, we have two conflicting interests. The surviving owner(s) will likely remain farming. The deceased owner’s family perhaps will not, and therefore no longer needs the machinery. The surviving owner(s) cannot likely pay off the deceased owner’s family in full, immediately at death for their share of the machinery. At the same time, we do not want the deceased owner’s family to go without their full share of the machinery, as an asset of deceased owner’s estate. Accordingly, there have to be some clear fair decisions made. The buy-sell agreement is the way to do it.

 

The agreement could contain the following split: assume there were two co-owners of a farming operation and one of the owners died, leaving his assets to his widow. The value of the machinery would be split 50/50. The fair market value would be determined by an independent appraiser. The surviving partner, as the continuing farmer, would receive his choice of the pieces of the machinery line, necessary for him to continue farming as a sole farmer.  Remember, the farming operation for the surviving partner will change considerably, because he lost his working partner. Down-sizing would be a likely occurrence in this situation. Accordingly, the remaining partner would receive their ½ of the machinery in this way. The remaining ½ would go to the surviving spouse. She would then sell it and receive the proceeds as cash. If it ended with an uneven split, then the surviving partner would compensate the widow with dollars to even the distribution. 

 

The above option with machinery is one of many options for one of the many questions that buy-sell agreements need to address. They are absolutely crucial in any farm where there are two or more owners involved. Proactively planning for the “what if’s” in life is very valuable. Trying to “pick up the pieces” and reactively plan after something has happened is very difficult and emotionally and financially stressful. Avoid that potential scenario. Plan for your farm’s future by completing a buy-sell agreement. It’s something you hope you do not have to use, but are very glad to have it if you do. 

Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 

 

Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

 

I often work with farmers with a land sale transaction that involves the concept of a partial sale / partial gift of land. This involves a situation where a land owner sells to a family member land for an amount less than fair market value. It is very important to properly document and account for the fact that the transaction is a partial gift and partial sale, and ultimately less than fair market value. The results of this are two part:

 

1)    Capital Gains Tax:

 

v Any portion of the sale over seller’s basis is subject to capital gain tax.

v Any portion of the sale under the seller’s basis would transfer free of capital gain tax.

 

2)    Gift Tax Ramifications:

 

v Depending on the amount of the gift, a gift tax return will likely need to be done, and the gift will be subject to the giver's unified credit. 

 

For example, John and Jill Doe own 160 acres of land, which a certified appraiser valued at $620,000 (best way to determine fair market value). They bought the land in 1980 for $80,000 (basis.) They want to sell the 160 acres to their son and daughter in law for $300,000.

 

The result of this transaction is as follows: John and Jill sold the land in 2011 for $300,000, which is $220,000 over their original basis of $80,000. The $220,00 is considered a capital gain will be subject to capital gains tax.

 

The $300,000 sale price was $320,000 less than the $620,000 fair market value. The $320,000 amount less than fair market value is the portion of the sale that will be considered a “gift”, and must be calculated as a gift. John and Jill Doe must have the proper gifting documentation done. 

 

One final note: Son and daughter in law’s basis in the land will be $300,000 (what they purchased it for) NOT the $620,000 current fair market value. 

Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 

 

Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.

“Don’t Worry . . . This Will All Be Yours Someday.” This statement is very common on family farms; spoken by a parent to their farming child, giving the child assurances that their hard work and effort on the farm will not be forgotten. However, if the right documentation is not completed (ESTATE PLANNING), the farming child is likely in trouble. 

 

Picture this scenario: A mother and father have three children, and farm. When the kids are young, they do the “responsible thing” and have a will made primarily to determine who their children’s legal guardian would be, should they both have an untimely passing. Also, “general language” in the will states that all of the assets first go to the surviving spouse, and then equally to all children. The wills are signed, and put away. 

 

Years pass. The family’s children all grow up and two of them go off to college, work hard and get good jobs. One child stays on the farm and works with mom and dad, helping them grow the farm and ensure its continued viability and profitability. The farming child works very hard and gets paid; although not any more than a general farm laborer. He is always told by his parents “Don’t worry – this will all be yours someday.” “You are working hard, and we want the farm to be yours.” Mom and dad say this, but the same wills that they drafted years ago remain put away. No changes are made reflecting their statements to the farming child. 

 

Years later, dad passes away. His estate passes everything to mom, including the land, the machinery and the farm site. The farming child – who has been farming for decades now – talks to his mother about estate planning. He reminds her on what they’ve always said “Don’t worry . . . this will all be yours someday.” Mom doesn’t change her will. She puts it off, as many do. Few want to think about their own mortality, especially after losing a loved one. Her will from years ago stays valid and put away. The farming child continues to work. He’s worried, but relying on what he was told. 

 

More years pass, and during a family get together, one of the non-farming children talk about their mother’s estate planning. They wonder “what it is.” The farming child speaks up and talks about what he has always been told: the farm will be his someday. The three non-farming children are shocked and arguments erupt. All sorts of statements are made regarding what their dad presumably “told them” and it was not at all consistent with what he told the farming child for years. 

 

The arguments continue and all of the children – including the farming child look to their mother to make the decision. Mom knows what was said to the farming child. At the same time, she does not want to upset her other children. She is getting pressured and pulled in different directions. What will she decide? Will she do anything at all? The future of the farming child’s career and all of the work and effort they put in to making the farm what it is today is in jeopardy. The farming child’s worst fears have come true. 

 

Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 

 

Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.