Protecting the Family Farm or Ranch FAQ’s

In many ways, a family farm or ranch is the same as any other family owned and operated business; however, there are important ways in which farms and ranches tend to differ. One of those differences is that a family farm or ranch involves a large tract of land that has likely been in the family for several generations. As such, the family business directly involves the family homestead in many cases. In addition, family run farms and ranches often lack the liquidity that other family businesses do not lack. The lack of liquidity is something that should be addressed in your estate plan.

The family farm or ranch may be worth a small fortune when you add up the value of all assets owned by the business; however, most of the value of a small farm or ranch is often tied up in land, equipment, livestock, or crops. In other words, the business is asset rich but cash short.

Estate planning contemplates the possibility of the creator’s death. If you die, your estate is potentially subject to federal gift and estate taxes. Those taxes are calculated based on the total value of your estate assets, including your non-liquid assets, at the time of death. If your estate does owe gift and estate taxes your estate may lack sufficient liquid assets to satisfy the debt. If that happens, your Executor could be forced to sell vital business assets to raise the necessary cash which, in turn, could threaten the future of your family farm or ranch.

A Family Limited Partnership (FLP) can help with several important estate planning goals. A Family limited Partnership (FLP) allows you to slowly transfer your legal interest in the farm or ranch to your children and/or grandchildren while still maintaining control over the day-to-day operations. At the time of your death, you will only own a small percentage of the business, meaning your estate will only be taxed for that value of your ownership percentage. An FLP also offers some important tax advantages that you may wish to consider when creating your estate plan.

If your family farm or ranch will not be passed down to future generations, your goal should be to ensure that your loved ones receive the fair market value of the business after your death. A Buy-Sell agreement may be your best option. This is a legally binding agreement with someone to purchase the business at a predetermined price or using a predetermined method of valuation upon the occurrence of a specific event, such as your incapacity, retirement, or death. In short, it ensures that the business will be sold for a fair price.