Dear Michael: We read with some interest your article pertaining to a plan to move farm assets from one generation to the next by using tax-deductible dollars on our income. Who would be the type of person who could make the most use of such a plan? We are using most of our income right now for living expenses – but in a few short years we’ll have the land paid off and we won’t need that much to live on after that. Most of our neighbors just keep buying machinery to offset income taxes, but sooner or later, you run out of those deductions, too. Are our prospects good for such a plan?
– Good Prospects
Dear Good Prospects: As you stated, at this point in time you are using your net income to live on. My guess is you’re in your early to mid-50s, as that’s usually when the transition comes from paying for all of the land to now looking for other ways to get out of paying income taxes. At this point, you probably are not a good candidate for such a plan.
When you do get done making land payments and decide you have enough land and you don’t want to continue buying more land or machinery to build your operation, then this plan would be perfect for you.
This is especially true if you’re helping the next generation get started.
However, if he had a tax-deductible plan to transfer assets, one which gives him a tax favorable treatment, he could let more and more of the new land purchase go through the next generation’s name – as well as machinery and other deductible expenses.
Under this plan, he could make tax-deductible contributions into the plan. He doesn’t have to take out RMDs as in a traditional tax-deductible plan, and he is allowed to put much, much more than the $56,000 of SEP or other traditional plans allow.
If he is doing a farm transfer, his son can even make tax-deductible payments to the plan and then do a land exchange in the future for the value of the plan. The plans will grow – both from deposits and from interest earned – until the elder farmer decides he wants to withdraw them on a monthly or annual basis. If the farm couple doesn’t need the withdrawals, these funds can then go to a next generation which likely has a much more favorable tax treatment of these dollars than Dad and Mom.
You might also need life insurance or long-term care benefits to make certain your family farm stays together until you die. Under this plan, again, you can set up these plans with tax-deductible dollars. I’m not a tax expert, CPA or tax attorney, but I do believe you can take up to $1 million from your qualified money tax-free if it’s to go to pay long-term care expenses.
If life insurance is needed to complete the purchase of the farm, again premium payments might be deductible with only the premiums paid towards the insurance amount – as well as the annual cost of insurance – being deducted from the tax-free life insurance benefits.
This is also terrific if a farmer has a back log of grain or other commodity sales sitting there waiting to be paid but has decided he really would prefer to retire or cut back drastically.
I’ve seen people with up to six years of back log commodities, and it’s a shame these values aren’t growing at interest (more than the elevator might pay) for all parties concerned.