Business and Financial

Farming takes planning.  A lot of planning.  Whether for next year’s crop, expanding a herd, buying land, constructing buildings, starting a new venture, or upgrading equipment, farmers are nearly always engaged in planning for how to keep the farm on track.  But  farm transition and estate planning—that is, planning for what happens to a farm business and its family from one generation to the next—is a whole different kind of planning.  And it’s one type of planning farmers often avoid.

Farm transition and estate planning can be challenging and uncomfortable, perhaps because it involves dealing with death, uncertainty, and difficult family decisions.  But like planning for the next year of production, farm transition and estate planning is critical to a farm’s success.  With good planning, a farm family can protect farm assets, implement family and business goals, and ensure a smooth transition of a viable operation to the next generation.  It’s the kind of planning that can pay off big. That's why we've written the Planning for the Future of Your Farm law bulletin series, a resource that explains the legal tools and strategies that can address a family’s goals. 

The ten-part series of bulletins in Planning for the Future of Your Farm includes:

1. Farm Transition Planning: What it is and What to Expect.  The concept of farm transition planning, common terms, what farmers can expect from the transition planning process, and how to prepare for it.
2. The Financial Power of Attorney.  A Financial Power of Attorney authorizes someone to make financial decisions for another.  We explain the different types and how they can help a farm business.
3. The Health Care Power of Attorney and Advance Directives.  Medical and end-of-life plans can ease decision making uncertainties for families.  This bulletin explains the Health Care Power of Attorney, Living Wills, Donor Registries, and Funeral Directives.
4. Wills and Will-based Plans.  A will is a commonly known tool for distributing property.  This bulletin explains different types of wills and how they can be used in a farm transition plan.
5. Legal Tools for Avoiding Probate.  We review legal tools that transfer assets upon death and avoid probate, including beneficiary designations, payable on death accounts, transfer on death designations, and survivorship deeds.
6. Gifting Assets Prior to Death.  Gifting is one way to transfer assets to the next generation.  In this bulletin, we discuss how gifting works and when it can be advantageous to incorporate gifting into a transition plan.
7. Using Trusts in Farm Transition Planning.  Trusts are popular tools in farm transition planning.  In this bulletin, we explain how trusts function and highlight how they can meet family and farm planning needs.
8. Using Business Entities in Farm Transition Planning.  Many farms have business entities for liability or tax purposes, but business entities can also enable transition of a business to the next generation.  We explain how in this law bulletin.
9. Strategies for Treating Heirs Equitably.  Whether heirs should inherit assets equally or equitably is a challenging dilemma for parents.  We present strategies for equitable distributions of assets in this bulletin.
10. Strategies for Transferring Equipment and Livestock.  Equipment and livestock can be more difficult to transfer than other assets.  In this bulletin, we review special considerations and strategies that can help minimize the challenges of these transfers.

Find the entire set of bulletins on the Farm Office website law library at go.osu.edu/farmplanning.  We also cover these topics in our popular Planning for the Future of Your Farm Workshop, offered online and in person each winter.  The next online workshop will begin January 23, 2023--check our Events Page at farmoffice.osu.edu for workshop registration details.  Reading our new bulletins and attending our workshop are two first steps that can help you plan for the future of your farm.

This resource is provided with generous funding from USDA National Agricultural Library, in partnership with the National Agricultural Law Center.

As anyone who has been an executor of an estate or has had to deal with an estate knows, the probate process can be slow, cumbersome and expensive.  Fortunately, much probate, and sometimes all probate, can be avoided with some planning and diligence.  The following is a brief discussion on how to avoid probate with different types of assets.

Real Estate

Survivorship Deeds.  Ohio law allows co-owners of real property to pass their share of the property to the surviving co-owner(s) upon death through a survivorship deed, also referred to as a “joint tenancy with survivorship rights.”  This type of deed is common in a marital situation, where the spouses own equal shares in the property and each becomes the sole owner if the other spouse passes away first.  The property deed must contain language such as “joint with rights of survivorship”.

Transfer on Death Affidavit. Another instrument for designating a transfer of real property upon an owner’s death is the “transfer on death designation affidavit.” This affidavit allows property to pass to one or more designated beneficiaries if the owner dies.  The process is simple, it requires the owner to complete an affidavit and file it with the recorder in the county where the land is located.  Upon the owner’s death, the beneficiary records another affidavit with the death certificate and the land is transferred without probate.

Vehicles

Ohio law also allows motor vehicles, boat, campers, and mobile homes to transfer outside of probate with a transfer on death designation made by completing and filing a Transfer on Death Beneficiary Designation form at the county clerk of courts title office.  There is a special rule for automobiles owned by a deceased spouse that did not include a transfer on death designation. Upon the death of a married person who owned at least one automobile at the time of death, the surviving spouse may transfer an unlimited number of automobiles valued up to $65,000 and one boat and one outboard motor by taking a death certificate to the title office.

Payable on Death Accounts

All personal financial accounts, including life insurance, can include payable on death beneficiaries.  The beneficiaries are added by using forms provided by the financial institution.  Upon the death of the owner, the beneficiary completes a death notification form and submits to the financial institution with a death certificate.  The beneficiaries are then provided the funds held by the account.

Business Entities

The many advantages of using business entities are well known but avoiding probate is an often-overlooked attribute of business entities.  Ohio law allows business entity ownership to be transferred outside of probate by making a transfer on death designation.  This is most commonly done with ownership certificates or within the operating agreement.  Upon the death of the owner, the ownership is transferred to the designated beneficiary with a simple transfer business document.  

Non-Titled Assets

Farms have many untitled assets such as machinery, equipment, livestock, crops, and grain.  These assets can be made non-probate, but it will require either a trust or a business entity.  For example, machinery can be transferred to an LLC.  Then, the LLC ownership is made transfer on death to a beneficiary.

Ohio law allows probate to be avoided relatively easily.  Estates worth many millions of dollars can avoid probate and make the administration easy.  However, the owner of the asset must take the time and make the effort to change the title or add a beneficiary.  An attorney familiar with estate planning can assist with making sure all assets are titled to avoid probate.  The executor and the heirs of the estate will appreciate having little or no probate to deal with.

A challenge that many farm families face is how to bring the next generation of farmers into the farming operation.  In addition to the challenges of management, delegation of responsibility and communication, the intensive capital nature of farming presents a unique challenge to many farm families.  That is, how to bring a 25 year-old into a multi-million dollar farming operation?  The next generation farmer may not have the resources to buy into the farming operation.  Also, the current generation may not want to make a large gift to get the next generation into the farming operation.   Using multiple entities can help reduce the challenges of this situation.

Let’s start with a typical farming operation that has all assets under common ownership, either as individuals or an entity.  The value of this entity is the combined value of all the farm assets.  For the next generation farmer to gain ownership in this operation, the total value of the farm assets is used to calculate their buy in or gift.  This scenario is illustrated in the following diagram:

In this scenario, Mom and Dad own all the farming assets in their names.  The total farming operation is valued at $3.5 million.  For Daughter to even enter the farming operation as a small percentage owner, say 10%, she should either need $350,000 to buy into the operation or Mom and Dad would need to gift her $350,000.  Also, Mom and Dad may be reluctant to give Daughter part ownership of the machinery and land in event Daughter ends up not staying on the farm.

To overcome this difficult situation, the farming operation is divided into three separate entities.  The operating assets are held in an Operating LLC, the machinery in a Machinery LLC and the land in a Land LLC.  By dividing assets among multiple entities, the total value of the farming operation has been divided among the entities.  See the following diagram:

Each entity has a value which is considerably less than the total value of all farm assets.  Now, Mom and Dad can bring Daughter into the Operating LLC as a 10% owner for only $50,000.  Daughter may have $50,000 available for a buy-in or, more likely, Mom and Dad are more comfortable making a $50,000 gift.  Also, it may be possible to get the Operating LLC to a near $0 value by distributing out the cash and grain to Mom and Dad before Daughter enters the operation.

The entity diagram after Daughter becomes an owner in the Operating LLC is as follows:

Daughter has become and owner in the Operating LLC and can help with management and decision making for the farming operation.  However, Mom and Dad retain full ownership and control over the machinery and land.  Perhaps after a few years, when Mom and Dad are more confident Daughter intends to stay on the farm, Daughter begins to buy into the Machinery LLC or is gifted ownership.  Or, perhaps Daughter eventually buys her own machinery for the farming operation.  The same can be done with the land LLC. 

When bringing in the next generation into the farming operation, a multi-entity should be considered.  It is a good method for the next generation farmer to enter the farming operation without the burden of accounting for the value of all farm assets.  It also allows the current generation to maintain ownership and control of the more important farm assets.

Barry Ward, F. John Barker, Eric Richer - Ohio State University Extension

Farming is a complex business and many Ohio farmers utilize outside assistance for specific farm-related work. This option is appealing for tasks requiring specialized equipment or technical expertise. Often, having someone else with specialized tools perform tasks is more cost effective and saves time. Farm work completed by others is often referred to as “custom farm work” or more simply, “custom work”. A “custom rate” is the amount agreed upon by both parties to be paid by the custom work customer to the custom work provider.

Ohio Farm Custom Rates

The “Ohio Farm Custom Rates 2022” publication reports custom rates based on a statewide survey of 223 farmers, custom operators, farm managers, and landowners conducted in 2022. These rates, except where noted, include the implement and tractor if required, all variable machinery costs such as fuel, oil, lube, twine, etc., and labor for the operation.

Some custom rates published in this study vary widely, possibly influenced by:

• Type or size of equipment used (e.g. 20-shank chisel plow versus a 9-shank)
• Size and shape of fields,
• Condition of the crop (for harvesting operations)
• Skill level of labor
• Amount of labor needed in relation to the equipment capabilities
• Cost margin differences for full-time custom operators compared to farmers supplementing current income

Some custom rates reflect discounted rates as the parties involved have family or community relationships, Discounted rates may also occur when the custom work provider is attempting to strengthen a relationship to help secure the custom farmed land in a future purchase, cash rental or other rental agreement. Some providers charge differently because they are simply attempting to spread their fixed costs over more acreage to decrease fixed costs per acre and are willing to forgo complete cost recovery.

New this year, the number of responses for each operation has been added to the data presented. In cases where there were too few responses to statistically analyze, summary statistics are not presented. 

Charges may be added if the custom provider considers a job abnormal such as distance from the operator’s base location, difficulty of terrain, amount of product or labor involved with the operation, or other special requirements of the custom work customer.

The data from this survey are intended to show a representative farming industry cost for specified machines and operations in Ohio. As a custom farm work provider, the average rates reported in this publication may not cover your total costs for performing the custom service. As a customer, you may not be able to hire a custom service for the average rate published in this factsheet.

It is recommended that you calculate your own costs carefully before determining the custom rate to charge or pay. It may be helpful to compare the custom rates reported in this fact sheet with machinery costs calculated by economic engineering models available online. The following resources are available to help you calculate and consider the total costs of performing a given machinery operation.

Farm Machinery Cost Estimates, available by searching University of Minnesota.

Illinois Farm Management Handbook, available by searching University of Illinois farmdoc.

Estimating Farm Machinery Costs, available by searching Iowa State University agriculture decision maker and machinery management.

Fuel price changes may cause some uncertainty in setting a custom rate. Significant volatility in diesel price over the last several months has caused some concern for custom rate providers that seek to cover all or most of the costs associated with custom farm operations. The approximate price of diesel fuel during the survey period ranged from $4.50 - $5.25 per gallon for off-road (farm) usage. As a custom farm work provider, if you feel that your rate doesn’t capture your full costs due to fuel price increases you might consider a custom rate increase or fuel surcharge based on the increase in fuel costs.

For example, let’s assume the rate you planned to charge for a chisel plow operation was based on $4.50 per gallon diesel costs and the current on-farm diesel price is $5.50 per gallon. This is a $1 per gallon increase. The chisel plow operation uses 1.15 gallons of fuel per acre so the added fuel surcharge could be set at $1.15 per acre (1.15 gallons x $1 gallon).

 The complete “Ohio Farm Custom Rates 2022” publication is available at: https://farmoffice.osu.edu/farm-management/custom-rates-and-machinery-costs