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Thursday, February 16, 2012

Will your agri-legacy be a monstrous estate tax bill?



 

When it comes time to turn over the farm to the next generation many folks will think that is easily done and there will not be any problems.  That’s too bad, because the   folks who don’t think they have a problem really do.  With land values increasing steadily, estate values have risen beyond anyone’s imagination.  That is coming at a time when the estate tax exemption next year declines to $1 million from the current $5.1 million, and when the tax rate on non-exempt assets rises from 35% to 55%.  What may not be a problem this year because of the higher exemption levels will become a major problem next year, and your family may have to sell the farm, just to pay your estate taxes.  Will your agri-legacy be a monstrous tax bill?

Estate planning for the agricultural community has become an emergency, not just because of the tax laws, but tax laws combined with the rising value of farmland. Iowa State University farm management specialist Kelvin Liebold offers a variety of issues to begin your family discussion about farm succession planning. He says not every farm will be appropriate for a transfer process because the younger generation has no interest in continuing the farm business.  That issue has to be identified early in the discussion.  At that point the discussion may end.  But if it does not, Liebold will help with the continuing challenges of shifting farm assets to the next generation.  However, he and all others who are currently speaking and writing on the topic will say that family communication, along with goal setting, needs to be accomplished before any visits to attorneys, financial planners, or insurance salesmen.  They need to be on your team, eventually.

Leibold says the succession plan needs to address the transfers of labor, management, assets, and all of the barriers to those and the risks that can consume the process.  Who is going to control the decision making and what is the hierarchy of control.  The older generation may not want to give up very fast or very much, but the transfer must be made with comfort to all involved.

One of the challenges is stability versus growth, and that will be a function of how many families are involved.  There was only one in the oldest generation, there may have been more than one family in the next oldest generation, and there may be several families in succeeding generations.  The decision on stability versus growth will be molded by a series of personal goals and business goals, and those are functions of investments, expectations for financial return, and what the business is really capable of doing.

Younger generations may not have much capital to invest, but they have time and energy and that should be compensated, but how?  That is a question that needs an early answer.  The management transition may occur over time, with younger generations taking more responsibility and older generations taking less.  Leibold says if the older generation is pushing toward a management transition, that could be one of the best things that could be done.

How do you transfer assets?  A younger generation farmer cannot afford them, but with the help of time and good planning, such a transfer is possible.  Leibold gave several examples:
1) The control of machinery is often transferred by lease or by sale. It may be a trade in return for labor, it may be a rental on a per use basis, and rates can vary.
2) Another method is the “buy and trade” where the older party allows for the sale of the equipment to be stretched out over time and the younger party to stretch out the time to purchase a line of equipment.
3) Another strategy is the “trade and buy back” where the older party trades in the tractor on the new one and then the younger party buys the old one back from the dealer.
4) Sometimes the older party will want to sell all of his equipment on contract, but which has to be carefully crafted for tax purposes for both parties.
5) Another method is to lease the equipment with the valuation adjusted each year.
6) The transfer of livestock can be at an inventory time such as the start of the fiscal year or when the inventory is lowest.
7) If you sell part of the breeding herd and jointly own livestock you need to realize that you may now look like a partnership with the associated benefits and liabilities.
8) There are some beginning farmer programs to encourage and assist in purchasing land.
9) Leasing land may be a more viable strategy with farmer tax credit programs to provide incentives to lease to beginning farmers.

Leibold says there are a bushel of tax issues that accompany the transition process for farmland, but one that will help is the “special use valuation” if the estate is structured properly.

A conference on farm succession planning is set for February 23, from 9 a.m. to 3 p.m. in Decatur, Illinois, to help families get started with the process.  Details are available at:  www.agri-legacy.com .

Summary:
Transition planning has been successfully done by many farm families, but a legal and financial team must be assembled to help with the process.  Family communication must be initiated, with many questions to eventually resolve, such as transferring labor, management, assets, and control of the farmland.

Posted by Stu Ellis on 02/16 at 11:20 PM | Permalink

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