The first step in a family farm succession is the cheapest, easiest and most convenient. And it is often neglected.
While legal issues such as form of ownership and taxes must be addressed when contemplating shifting ownership from one family member to another, communication should be the starting point, lawyers say.
“The first thing is that everybody should sit down and talk,” said Quincy, Ill., lawyer Joseph Allwood. “Oftentimes, it’s not something that is discussed nearly enough.”
Allwood is a coordinator for the International Farm Transitions Network. He has witnessed some bad decisions that usually begin with poor planning — or no planning at all.
“Sometimes they don’t really make a plan; they just expect that things are going to go the way they want them to,” Allwood said. “And that doesn’t always work when other people are involved, unfortunately.”
Columbia, Mo., attorney Connie Haden, who specializes in agricultural law, encourages families to pursue all avenues. Among other things, she helps families wade through the legal maze that includes tax implications.
The tax reform act passed by Congress last year provides relief for families passing along farms or other estates, but the fact that the individual portion of the bill is not permanent complicates planning. It doubles the individual capital gains exemption, from a base of $5 million to $10 million.
“That pretty dramatically changes the picture for many of my clients,” Haden said. “It does sunset. It’s a bit tricky for us as planners. The last time we had a sunset — the Bush tax cuts — (Congress) made it permanent. It depends on the administration at the time.”
Estate planning often kicks in when a farm owner dies, so that complicates planning when dealing with an expiring tax cut. There are things families can do, however, to transfer property before death occurs.
“We had a few clients who did that the last time,” Haden said. “They made gifts with the larger deduction before it went away.”
One thing in the favor of farm families is that the new tax bill keeps the so-called stepped-up basis, a provision that benefits those inheriting assets. Without it, an asset such as land can be subject to capital gains tax on its increased value.
Haden used an example of parents who bought land decades ago for $500 per acre, which is today worth $5,000 per acre. Sellers of the land would have to pay tax on $4,500. The stepped-up basis, included in the 2017 tax bill, eases that, as long as the property stays with those it is passed to.
“Whoever inherits that property now gets that $5,000 basis,” she said. “That is hugely advantageous to farmers with significantly appreciated land. There were a lot of talks that that was to go away for farmers, but it didn’t.”
Other ways of minimizing capital gains taxes include selling a farm in installments, rather than a lump sum.
“Depending on the taxable situation of the parents, that can either greatly reduce the capital gains tax paid, or sometimes even eliminate it,” Haden said.
But before any of those decisions are made, basic information must be gained. Allwood believes the first meeting should be of family members around the kitchen table.
“They need to make sure that the farm going forward is even going to be a viable possibility,” he said. “That way, there won’t be any surprises at the end. Then, you’re going to want to talk to the bank, or whoever your financing is through, to make sure that financing will continue to be viable as well. Because if you can’t get money, it’s not going to make it anyway.”
An important step is discussing the family’s goals with a lawyer, who can set up a plan for succession that may include alternate structures such as trusts, he added.