Passing on a family farm is no simple feat.
Most farm families don’t know where to begin when thinking about the future of their farm. Let’s face it, determining how to sustain the farm operation for later generations and how to divide the estate fairly among kids is difficult. This gets particularly tricky when some kids are working the farm and others are not.
To avoid a confusing mess, building a detailed succession and estate plan for the family farm is essential. Families that fail to put proper planning in place put both family harmony and their most valuable asset at risk.
So perhaps you’re asking yourself, “How can a family pass the farming operation—and access to the land and equipment necessary to run it—to a farming heir without neglecting non-farming family members?” Fortunately, there are several ways to accomplish this goal. Three of the most common options available include:
The farming heir can purchase the farm from his/her parents once they’ve reached retirement age, and the proceeds can then be incorporated into the parents’ estate plan and divided among heirs accordingly. However, there are drawbacks to this approach. The purchase can result in capital gains and recapture taxes for the parents, which reduces the value of what they’re able to pass on once they pass. Additionally, it requires that the farming heir have access to large amounts of money or take out significant debt to complete the purchase.
Alternatively, the farming heir can purchase the farm after both parents’ pass. This allows him or her to take advantage of estate planning rules which eliminate the capital gains tax, because the farm receives a step-up in basis after the parents’ death. However, the heir may have to pay more for the farm at the parents’ death instead of their retirement because the farm’s value can increase during that period of time.
The most popular way to achieve longevity of the family farm and equity among the children is to create a LLC, a limited liability company. By placing the family farm in an LLC, parents keep the farmland together—which benefits the farm heir. The parents give individual units equally to each heir while allowing the farming heir the right to rent or crop share with the other heirs for his or her lifetime or another specific time period. With this technique, specifically stating the mechanism to establish the heir’s rental rates or crop sharing arrangement in the estate plan is crucial. The more specific the terms, the less room for ambiguity and family arguments.
No matter which option farm families ultimately choose, it’s crucial to have a detailed, formal plan in place which outlines terms and, when possible, minimizes taxes.