There was a time in America when family farms and ranches were common place. Although that time has long since passed, family farms are still alive and well in some areas of the country. If you are the owner of a family farm, the odds are good that is has been passed down through your family from one generation to the next for decades — if not centuries. If you plan to continue that tradition by passing the farm on to your children, planning is the key to a successful transition from one generation to the next. Toward that end, the Grand Forks estate planning attorneys at German Law discuss estate planning for the family farm.
Why Is Estate Planning Different When a Family Farm Is Involved?
Estate planning is important for everyone; however, it takes on a heightened importance if you own a family farm. Successfully passing down the farming operation intact is critical, both from a financial and an emotional standpoint. Doing so, however, can be a complex and difficult task. In fact, many family farms and ranches do not make a successful transition to the next generation because of some common estate planning mistakes, such as:
- Failing to plan. Operating a family farm is hard work, plain and simple. Most farmers are up at the crack of dawn and don’t stop until the sun goes down six, even seven, days a week. Taking time out to contemplate and create an estate plan is probably not at the top of your list of things that need to be done – but it should be. Because failing to create an estate plan could mean the loss of the farm down the road. The unique financial and logistical nature of a family farm means that simply gifting it to your children in your Last Will and Testament won’t work.
- Failing to plan for incapacity. Estate planning, when done properly, doesn’t just plan for death, but also for the possibility of incapacity. As the owner of a family farm, planning for the possibility of your own incapacity is crucial. A farm cannot function for long without someone at the helm – and that person must have the proper legal authority to operate the farm. Imagine if you were injured in an accident tomorrow and became incapacitated. Without a plan in place, no one would have the legal authority to negotiate contracts for the purchase of supplies nor for the sale of products. Banks, suppliers, customers, government agencies would all be unwilling to continue working with your farm without plans in place that contemplate just such a scenario.
- Ignoring or underestimating the need for estate liquidity. Small to medium size farms are typically short on liquid assets because the value of the farm is usually tied up in land, equipment, livestock, and other non-liquid assets. Federal gift and estate taxes, however, are calculated based on the value of your estate, without regard to whether your estate assets are liquid or non-liquid assets. If your estate lacks sufficient liquid assets to pay the tax due, assets must be sold to pay off the debt. Selling assets, however, could put the entire farming operation out of business.
- Waiting until death to begin the transition process. Turning over the farming operation to the next generation should begin long before your retirement or death. This applies to both the legal and practical aspects of the business. First, make sure your children truly want to take over the operation. Second, start training them to do so as early as possible so that they are ready to take your place and customers/business associates are prepared to accept them as your replacement when the time comes. Finally, there are numerous advantages to beginning the legal transfer of ownership of the farm to the next generation early on instead of waiting until the last minute. Using a family limited partnership (FLP), for example, can allow you to retain the right to manage to day-to-day operation of the business while still transferring legal ownership to the next generation over a period of years. There are significant tax advantages to using a FLP as well.
Contact a Grand Forks Estate Planning Attorney
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about the probate of an estate in North Dakota, contact the Grand Forks estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.