Farming clients often misunderstand or oversimplify the estate planning process. Secondhand advice routinely fails to consider unique issues related to estate tax, the process of probate, family business succession planning and family dynamics. Consulting with an estate planning attorney can ensure that your loved ones possess the tools to “hold onto” the family farm.
The current federal estate tax exemption stands at $5,430,000.00 per individual — with a portability provision allowing a married couple to affirmatively exempt, by election, up to $10,860,000.00 of taxable property. Considerations surrounding Special Use Valuations (see IRC §2032A), lifetime gifting/transfers and capital gains tax are of particular suitability to agricultural clients facing the imposition of federal estate tax. While jurisdictions vary widely state by state, a number of states have recently adopted favorable agricultural tax treatment, effectively exempting farmland from state inheritance tax. It should be noted, however, that the nuances and specifics of state by state tax treatment of farmland is beyond the scope of this article.
While taxation issues are largely predictable, emotional responses are not. Grief and the particular financial status of your heirs can make equitable distribution in family business succession planning difficult to achieve. An honest and frank conversation with your family and counsel, to identify and sort through such issues, in advance, is recommended. Such discussions frequently reveal the family’s primary goals and objectives, whether they be to preserve the farm for future generations, avoid death tax or eventually sell the farm for maximum value.
A careful examination of the titling of the farm is often the place to start when beginning family business succession planning. Unfortunately, no single magic bullet exists for all circumstances. Simply adding a child’s name to the deed may serve to avoid the process of probate and, likely, reduce state inheritance tax, but may also alienate those children not named in the deed—not to mention expose the farm to that child’s creditors and/or fallout from a divorce. The transfer of the farm to an entity such as a trust or LLC may impose transfer restrictions, thereby ensuring that the family farm stays intact. Similarly, the transfer of a remainder interest and retention of a life estate may, again, avoid probate, but most likely fail to avoid the imposition of death tax.
Many farmers are described as land rich and cash poor. Should state or federal death tax become due, the issue of liquidity may spell disaster. With death tax come deadlines — and with missed deadlines come penalties and interest. Where will your heirs turn to pay impending inheritance tax? If need be, do they possess the requisite credit rating and financial stability to obtain a loan? Perhaps the fire-sale of the farm, at a reduced price, will be the only way to turn. Consideration of the farmer’s overall financial statement now is suggested.
Two words — family dynamics. In all likelihood, not all of the children in the family will express an interest in continuing to work the family farm. This can make treating all of your heirs equally in your family business succession planning — a goal most parents strive to meet — nearly impossible. If one child manages the farm, must he or she pay rent to his or her non-farming siblings? Given that the non-farming children may also have an ownership interest in the farm, do they too have a say in farm management decisions? A well-thought-out family business succession plan typically delegates day-to-day farming decisions to the farming child with larger, overriding decisions falling to all of the children involved. If at all possible, perhaps the farming child can simply buy out the interests of his or her non-farming siblings. If not, perhaps paying the farming child a salary — with the remaining net profits being divided equally amongst all of the children — is a viable solution.
As you have likely now gleaned, there is no single approach to agricultural and family business succession planning. Rather, farming families should consider an in-depth review of their goals and objectives. The attorneys at Stock & Leader welcome the opportunity to serve as your trusted advisor during that process.