Farming has been the cornerstone of our country for hundreds of years. Although the percentage of the population engaged in farming has decreased dramatically since our country’s founding, there are still two million farms operating over 900 million acres of land in the United States[1], 98% of which are family farms[2], with six million people living in households attached to a farm.
As a farmer or farm owner, you may have a stronger emotional attachment to your business than other business owners. This is probably because the farm has been in your family for generations and is also the location of the family home. To ensure that this legacy and business is protected for future generations, it is crucial that you do the proper planning.
1. Understand Everyone’s Goals
The key to a smooth transition, regardless of when it happens, is to understand everyone’s goals. Because the family farm is such a large and complex asset, it is necessary for everyone to be prepared for this transition (whether it occurs at your retirement or death).
Your Goals
It is important that you take the opportunity to sit down and evaluate your own goals for the future and your goals for your family and the business. Because the farm may be a substantial or sole source of income, deciding to retire and hand over control may be financially (and emotionally) difficult. It signals a new chapter in your life, and you may be wondering how you are going to financially support this new chapter without the income from the farm. A well-thought-out transition plan can enable you to transition out of the business in the way you want.
Especially if the farm has been in your family for generations, it is probably important to you that the farm continues to be operated by future generations. To accomplish this goal, there are several issues you should consider: What if not all of my children want to participate in the farming operations? What if someone in the next generation already has or could have creditor or judgment issues? How do I protect the farm and provide for my family? With the proper planning, we can help you address these concerns and achieve your ultimate goals.
Family’s Goals
The concerns of family members that are in line to receive the ownership and control of the family farm are likely to differ from yours. By wanting to continue the farming operation, it is clear that they value the legacy of the farm and the history it represents to the family, but they may have different needs.
With a highly valued asset, such as a farm, the next generation will want to receive it in a way that minimizes or eliminates transfer taxes. The last thing your family wants is to have to sell the farm to pay the estate tax bill upon your death. As they take on a larger role on the farm, the next generation may want to have more decision-making authority and even partial ownership. By planning ahead, we can help structure a transition that allows for a smooth transfer of control.
Make a Plan and Keep It Up to Date
Estate Plan
Just like a productive farming operation, a well-prepared estate plan needs to utilize the right tools, such as a will, trust, and powers of attorney, to carry out your objectives.
A properly executed trust and financial power of attorney will help protect you and the business should you become incapacitated or otherwise unable to manage the farm. As with any business, when the key person becomes incapacitated, things can go off the rails if there is no one ready to step up and take charge. These documents appoint a person, ahead of time, to make decisions on your behalf, instead of waiting until you become incapacitated and making your family go to court to appoint someone.
Upon your death, a trust helps to ensure that what is passed to your surviving spouse or beneficiaries is protected from future creditors or judgments. It also allows the assets to be distributed according to the terms of the trust without interference by the probate court. Not only does this create a smoother and quicker transition in ownership, but it also maintains family privacy and reduces expenses.
IMPORTANT: You need to make sure that you work with an experienced estate planning attorney to ensure that any trust that is created and funded with farming assets is structured in a way that does not disqualify or reduce any governmental farming subsidies you could be receiving.
If you already have an estate plan in place, then it is a good idea to review your documents on a regular basis. In life, there are many personal and legal changes (births, deaths, marriages, divorces, illnesses, bankruptcies, lawsuits, etc.) that can occur. Having outdated documents can sometimes be worse than not having any documents at all.
WARNING: It may be tempting to title assets jointly with a family member or to execute a transfer-on-death deed to facilitate an “easy” estate plan. While these solutions will transfer the property to the survivor without much involvement by anyone else, these types of ownership are full of disastrous possibilities that could undo everything you have worked hard to build by subjecting the farm to the claims of the creditors of all the other owners, as well as yours.
Business Planning
Estate planning is just one prong in ensuring the survival of the family farm. It is important to make sure that the farming structure and operation is set up to accomplish the family’s objectives as well. The first step is to evaluate the current business structure being used for the family farm.
Most farming businesses, regardless of size, are held as sole proprietorships.[3] It is likely you own the farming land and equipment in your own name (or jointly with a spouse) and possibly have mortgages or loans on these assets in your own name as well. Sole proprietorships are attractive because they do not require any filings, except for registering a trade name if you want to operate the business under a name other than your own. There are also no annual filing requirements or fees owed for this type of business structure. While a sole proprietorship is incredibly easy to form, since it happens by default, it also opens you up for unlimited liability since you and the family farm are considered to be the same legal entity. This means that your personal creditors could look to farm assets to recover judgments against you. It also makes transitioning the farming operation a lot more difficult should you become incapacitated or die.
Alternatively, a limited liability company (LLC) or a family limited partnership (FLP) can be formed to protect assets, reduce tax liability, and provide for an orderly transfer of control and ownership with minimal conflict between family members. Using these business entities, a management and decision-making structure can be established that will not only facilitate the current success of the farming business but also allow all the affected family members to feel assured that plans for the farm’s future operation will be implemented. A properly implemented decision-making structure can also provide continuity in operation should you become incapacitated and unable to participate in the farming activities. Tools such as a buy-sell agreement, management agreement, or employment agreements can be used to help facilitate this smooth transition. It is important to note that with either of these business structures, the proper business formalities must be followed, such as annual filings and payment of the required fees to the secretary of state, to maintain the liability shield around the family farm.
Liquidity Needs
More than likely, the family farm is the largest asset you have. This can pose a challenge when funds are needed for your long-term care, providing an inheritance to a non-farming heir, and/or covering any state or federal tax liability that may be assessed on your death.
Your financial advisor, insurance specialist, and banker can assist you with securing lines of credit and the proper amount of disability insurance, long-term care insurance, and life insurance. While no one wants to have the conversation about possibly ending up in a nursing home or dying, the financial consequences of these events to a farming family can be more severe than they are for most families. Failing to plan ahead may require your family to sell the farm in order to pay for the medical bills, trust or estate administration expenses, or other debts when you become ill or pass away. By working with a trusted advisor team, you can protect your family and your business through all stages of life.
We’re Here to Help
We understand the importance of the continuation of your family farm and legacy for future generations. We are here to assist you with a coordinated plan and guidance to ensure that this legacy will be a lasting one. Give us a call today to speak with an experienced Madison Estate Planning Attorney, we can discuss the right plan for you and your family.
[1] “Farm Income and Financial Forecasts for 2019,” U.S. Department of Agriculture, webinar transcript, slide 2 accessed August 14, 2019, https://www.ers.usda.gov/media/10186/farm-income-webinar-march-2019-transcript.pdf.
[2] “America’s Diverse Family Farms,” U.S. Department of Agriculture, (December 2018), p. 3, accessed August 12, 2019, https://www.ers.usda.gov/webdocs/publications/90985/eib-203.pdf?v=9520.4.
[3] 89 percent. “America’s Diverse Family Farms,” supra note 1, at 18.