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According to the USDA National Agricultural Statistics Service (NASS) – family-owned farms make up 97% of 2.1 million farms in the US. Among the family farms surveyed, 67% expected ownership to naturally pass on the next generation while only 23% actually had a succession plan.
The report suggests that losing a multi-generation farm business happens more often than you think. In fact, only 30% of the farms surveyed continue into the second generation and even fewer (12%) survive into the third generation.
Don’t let years of hard work come to a devastating end. Here is a list of essential estate planning tips for farmers, farm families, and anyone in the agriculture business. Whether you’re a legacy family enterprise or a start-up farm or ranch owner, you need to map out the long-term success of your farming business with smart estate planning.
Tip #1 Know Your Estate Planning Needs
As a farm business owner, there are many issues to consider to protect the business and ensure its success in case you retire, become incapacitated, or die. Ask yourself these questions to begin the process of creating your farm estate plan and succession plan.
- What are the farm’s assets and their approximate value?
- Who should I transfer those assets to—and when?
- Who should manage those assets if I cannot—either during my lifetime or after my death?
- Who should make decisions on my behalf if I am unable to?
- What do I want done with the farm if I suddenly become incapacitated or die?
Download your free copy of our California Estate Planning Guide to maximize the actual value of the farm estate you’ll leave to your heirs and beneficiaries.
Tip #2 State Your Goals
Farm land and a farm business are two different things. However, they both need to be addressed simultaneously, and the specifics of what to do with each will depend on your situation. Some issues to consider:
- What will happen to the farm when I die?
- Will the farm operation continue to be run by the family?
- Will the land stay in the family and will the farm operation be run by others?
- Will the farm cease operations and assets sold?
Tip #3 Decide on a Transfer Strategy
You’ll need to make a decision about whether to sell to a third party or leave the farm business to your family when you pass away or retire.
If you’re planning on selling the farm business, you’ll want to maximize the value of the farm operation and get top dollar when you sell.
If you’re transitioning the farm to a family member, the reverse applies. You’ll want to minimize the value of the farm business so you can transfer the most assets for the least amount of tax.
Consider these actions when developing a farm transfer strategy:
Planning to sell:
Establish legal partnerships, LLCs, or corporations to allow separation of management and ownership
- Prepare Buy-Sell Agreements to ensure an orderly transition of the farm business
- Consider a Lease Agreement with option to purchase
- Retain the option to fund your retirement or trust for your beneficiaries from the sale proceeds
Planning to transfer to beneficiaries:
- Reduce estate taxes, if you are subject to estate taxes
- Create the option to hand-over the farm property as a “gift,” subject to donors’ income tax
- Retain the option to hold the farm assets in a Trust
Tip #4 Create a Farm Succession Plan
If you want a legacy farm, you need to get the family organized so that the business will survive multiple generations.
Here’s a list of considerations to help you create a family succession plan:
- Do you have a management team in place?
- Are family members involved in management of the farm, and, if so, how?
- Who are your tax and legal advisors?
- What is the equitable distribution of farm income and assets among family members?
- Are there family issues to consider? Might there be a conflict between your surviving spouse and your heirs?
- How will your plan change if there are new family members? If there are disowned family members?
- How will you adjust your plan if there are changes in your finances or tax laws?
- What will be your source of income when you retire from the farm business?
For a complete guide to creating an ideal family farm succession plan, check out these resources from California Farmlink.
Tip #5 Place The Farm in a Trust
A farm trust is a legal tool for holding, managing and distributing property. It’s an essential strategy in your farm estate plan that lays out how you want your assets managed during your life and distributed after death.
There are 4 components to a Farm Trust that you need to identify to get started (1) your Trust Property, specifically your farmland, farm business, or cash; (2) your Successor Trustee or Representative; (3) your Trust Beneficiaries, specifically your children, business partners or others; and, (4) your Instructions for how the Trust Property should be used or distributed.
Choose from these 3 Types of Trusts:
1. Revocable Living Trust
This type of trust can be amended or “revoked” before your death. It can be adjusted to accommodate changes in your life circumstances, if you want to add and remove beneficiaries, for example. It’s a flexible strategy that lays out how the farm should be managed in case of disability or incapacity.
Placing the farm in a Revocable Living Trust means the trust owns the farm, and not you as an individual. However, you retain the ability to manage, sell or transfer the farm assets in the trust as the owner or trustee. You keep all the control over the revocable living trust.
2. Irrevocable Living Trust
Like the name suggests, this trust cannot be changed and assets cannot be reclaimed after you create the trust, unless the trust document says so. An irrevocable trust can also be used during your lifetime and in case of disability or incapacity.
3. Testamentary Trust
Often created with a will, a testamentary trust takes effect after your death. It is used to protect your assets and minimize estate taxes for your beneficiaries.
Once you have considered these tips, the next step is to seek the advice and services of a qualified estate planning lawyer who can help you create a farm estate plan, and advise you on such issues as taxes, organizing titles and trust documents, and facilitating the smooth transfer of farm assets and farm operations to your beneficiaries.
Start taking action now with your estate planning by scheduling your free consultation with our team at Crider Law Group.