If you own a family farm, there is a good chance that the land and the business have been in your family for several generations. Eventually, you will pass the farm down to future generations or sell it. That could happen when you retire, die, or become incapacitated. Many farmers, however, fail to include their farming business in their estate plan, resulting in the loss of money or loss of the entire farm when something happens to them. To make sure that your farm and your family are protected in your estate plan, the Grand Forks estate planning attorneys at German Law discuss estate planning for farmers.
Potential Pitfalls for Farmers
According to the U.S. Department of Agriculture, there were just over two million farms in the United States in 2021. Over 80 percent (81.5) of all farms had less than $100,000 in sales per year. These are America’s small farmers, and they continue to represent the American dream. Unfortunately, small family farms are frequently fraught with problems when the family matriarch or patriarch passes away or becomes incapacitated.
One pitfall for small farms is a lack of planning. Farmers are a hearty bunch, and they tend to dismiss the idea that something might happen to them. If incapacity or death does suddenly strike, the farm can fall apart quickly if there is no designated successor who is willing to step in and take over and has the legal authority to do so.
Another potentially devastating pitfall often faced by small farms is the tax pitfall. Every taxpayer is potentially subject to federal (and sometimes state) gift and estate taxes. At a tax rate of 40 percent, federal gift and estate taxes can quickly decimate the value of an estate. Farms are particularly vulnerable to estate taxes because farms are often cash poor businesses. While the business may be worth $2 million, for example, that value is in the land, livestock, and equipment. Taxes, however, are imposed on the overall value of all assets. If sufficient cash is not available to pay any estate tax due, assets that are necessary to keep the farm business going may have to be sold to pay the tax.
How Proper Estate Planning Can Protect Farmers
The good news is that estate planning can help protect your farm and your family by incorporating a farm succession component into your overall estate plan. The details of your farm succession plan will depend on your individual circumstances; however, there are some common tools and strategies used by farmers to protect the family farm.
You might, for instance, decide to convert your sole proprietorship into a Family Limited Partnership. Doing so can accomplish several goals. First, it can designate your successor or successors so everyone knows who will take over when you retire or if something happens to you. Second, it allows you to slowly transfer legal ownership of the farm to the next generation while still maintaining control over how the farm runs. Finally, because you have transferred the bulk of the legal ownership of the farm to other people, your estate tax burden will decrease dramatically when you die.
If the next generation is not interested in continuing the family business, you still want to ensure that your family receives the true value of the farm if something happens to you. Sadly, many family farms are sold for a fraction of their true value when surviving loved ones are faced with selling the farm after the death of the patriarch/matriarch. A Buy/Sell agreement can prevent this from happening to your family. In short, a Buy/Sell agreement determines who will purchase the farm, under what conditions, and for a set price or using a pre-determined method of valuation.
Contact Fargo Estate Planning Attorneys
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about estate planning for farmers, contact the Grand Forks estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.
John grew up on a small livestock farm in west central Minnesota. He now lives in Grand Forks with his wife Maggie and their two daughters. In his free time John enjoys reading, taking his family to North Dakota and Minnesota state parks and rooting for all UND and Minnesota professional sports.
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