There are many legal rules covering farms – rules that producers might not be aware of.
A farm building may not be covered by standard insurance. Farm buildings are exempt from the state building code. And many standard insurance policies exclude coverage for buildings not built to a certain code.
Consider the example of a freestall dairy barn collapsing under the weight of a heavy snow load. Winter isn’t over yet; remember how much snow fell in February 2019. A loss from snow load may or may not be covered by a producer’s insurance policy. Each producer should visit with his or her insurance agent to review insurance policies. Specifically ask whether a policy covers snow-collapse damage to farm buildings. A more-specific type of insurance policy might be needed that not only covers farm buildings but also specifically covers snow-collapse damage. Don’t wait to review insurance policies until after a loss; it’s too late then. Conduct an insurance review now before the next snowstorm hits.
A Wisconsin homestead is not exempt if owned by an LLC. I previously discussed the Wisconsin homestead exemption in the Aug. 23, 2018, issue of Agri-View. Visit www.agriview.com and search for “Seelen” to read it.
Exemptions are assets that are protected from unsecured creditors. The Wisconsin homestead exemption allows a debtor to exempt $75,000 of equity in a homestead – defined as a dwelling and so much of the land surrounding the dwelling that is reasonably necessary for use of the dwelling as a home. A married couple who both own the homestead can protect $150,000 of equity in their homestead.
Consider an example where a producer transferred all the farm real estate, including the homestead, into an LLC. The producer doesn’t qualify for the homestead exemption if the homestead is titled in the name of the LLC; the producer personally must own the asset he or she is seeking to exempt. In the example the producer doesn’t own the homestead; the LLC does. Under those facts the Wisconsin bankruptcy courts have denied the homestead exemption. If the homestead exemption is denied, the producer could lose the equity in the homestead to any unsecured creditors. With a $75,000 exemption for one debtor or a $150,000 exemption for a married couple, that’s a lot of equity at risk.
If having difficulty paying debts or contemplating filing for bankruptcy, a producer needs to be sure to inform his or her attorney that the homestead is titled in the name of an LLC. Ask what steps can be taken to make the homestead eligible for the homestead exemption.
Capital-gain taxes can be discharged in a Chapter 12 bankruptcy case. For those in financial distress, one of the ways to pay off debt is to sell farm real estate. But one of the impediments to selling real estate is the sometimes-large capital-gains taxes generated by such a sale. Indeed there’s little incentive for a debtor to sell real estate if the mortgage lenders receive all the sales proceeds – and there’s no money left to pay the debtor’s capital-gains taxes. But about two years ago Congress changed the Bankruptcy Code to provide that capital-gains taxes from the sale of farm assets would be treated as unsecured debt that could be discharged in a Chapter 12 bankruptcy case. So keep that in mind if selling farm real estate to pay creditors. With the assistance of counsel, a producer may decide Chapter 12 provides an effective method for dealing with capital-gains taxes.