Business and Financial

By: Robert Moore, Wednesday, March 13th, 2024

Legal Groundwork

Estate taxes are receiving a lot of attention due to the impending reduction in the federal estate tax exemption in 2026.  If Congress does not extend or make permanent the current estate tax exemption, the exemption in 2026 will be $5.5 million per person plus inflation.  The inflation-adjusted estate tax exemption for 2026 is expected to be between $7 million and $7.5 million.  The current federal estate tax exemption for 2024 is $13.61 per person.

The lower federal estate tax exemption will still be high enough for most people to avoid federal estate taxes.  However, some farmers will see themselves move into the federal estate tax bracket in 2026.  People who will find themselves subject to estate taxes due to the 2026 sunset provisions are exploring strategies to help reduce estate tax liability.

One such strategy that may be considered is gifting.  In some situations, gifting can help reduced estate taxes.  In other situations, it may have little effect and have detrimental effects on income tax strategy.  This article will discuss how gifting may or may not help with estate tax liability and the implications of gifting.

Annual Gifts

One gifting strategy to help reduce estate taxes is using the annual gift exclusion.  As stated above, multiple gifts of up to $18,000 can be made without tax to either party.  The gifts can be money, shares in a business entity, real estate or almost any other kind of asset.  The annual exclusion gift can be an effective strategy for those people who have many potential recipients for the gift and/or may be close to or just over the federal estate tax exemption.  Consider the following example:

Grandma has 10 grandchildren.  She calculates that she will be about $200,000 over the estate tax exemption in 2026.  She gifts each grandchild $18,000 in both 2024 and 2025.  The gifts allow Grandma to gift a total of $360,000. 

This gift allowed Grandma to move back under the estate tax exemption and avoid estate taxes. Neither Grandma nor grandchildren will pay gift taxes on the gift.  As the example shows, using the annual gift exclusion can be an excellent way to reduce or eliminate estate taxes.

The primary limitation to the annual exclusion gift strategy is that it may have limited effect for people who are significantly over the federal estate tax limit.  While $18,000 is not a small amount of money to gift, it may be too small to make much of an impact on estate taxes of higher wealth people.  Let’s continue the previous example with a change of facts:

Grandma’s net worth will be $2,000,000 million over the exemption in 2026. 

Even though Grandma can gift $180,000 each year to her grandchildren, it will take 12 years for Grandma to gift away $2,000,000.  Additionally, her net worth will likely increase each year.  In fact, the increase in net worth may outpace what she is able to gift each year.  While annual gifting will always help reduce potential estate taxes, this strategy may only be moderately helpful for higher wealth people.

Lifetime Credit Gift

Another strategy is to make large gifts more than the $18,000 annual exclusion gift.  As discussed above, large gifts can be made without paying gift tax.  However, the estate tax exemption is reduced by the amount of the gift.  So, making lifetime credit gifts are offset dollar-for-dollar by a reduction in the estate tax exemption.  However, this strategy can still be effective when gifting assets that are expected to appreciate in value.  Gifting these assets keeps the appreciation out of the Giftor’s estate.  Consider the following example:

Grandma owns the Smith Farm that sits next to town.  It is currently valued at $1,000,000. She expects commercial development pressure to cause the value of the Smith Farm to increase to $3,000,000 in the next few years.  Grandma decides to gift the Smith Farm to their grandchildren.

Grandma can gift the Smith Farm without paying gift taxes.  Her federal estate tax exemption will be reduced by $2,000,000.  So, the gift itself does not help her estate tax situation.  However, when the Smith Farm increases in value by $2,000,000, that appreciation in value will be assumed by the grandchildren.  Grandma has essentially been able to gift $3,000,000 out of her estate while only using up $1,000,000 of her estate tax exemption.

This strategy may not be the best strategy for assets that will have no or little appreciation.  For a non-appreciating asset, the gift just comes off the estate tax exemption and does not help the estate tax situation.  Again, large gifts work best with appreciating assets.

Capturing the Higher Lifetime Credit

As stated previously, the current lifetime credit gifting allowance is $13.62 million which will decrease by about one-half in 2026.  So, there is an opportunity to make a very large gift now and capture the large gift allowance before it is reduced.  Consider the following example:

Grandma has a net worth of $20,000,000.  She is concerned she will be over the estate tax exemption limit by $13,000,000 in 2026 resulting in around $5,000,000 of estate taxes.  To avoid these taxes, Grandma gifts $13,620,000 of land to her grandchildren in 2024. 

In this scenario, Grandma is able to gift her entire lifetime credit which reduces her estate tax exemption is to $0.  But, when the estate tax exemption is reduced to $7,000,000 in 2026, there will be no claw back of her gift.  That is, her estate tax exemption will remain at $0 and the IRS will not seek to recoup any of the 2024 gift exceeding $7,000,000.  So, Grandma is able to gift $13,620,000 in 2024 and there is no claw back of the extra $6,620,000 in 2026 when the exemption is reduced.  Grandma’s net worth is reduced to $6,380,000, which will be less than the 2026 exemption amount, and therefore Grandma has avoided all estate taxes without paying any gift taxes.

Obviously, this strategy only works for very high wealth individuals.  The person must have enough assets to gift more than the full exemption amount and still have adequate assets remaining to support themselves.  Most people do not have enough wealth to make this strategy work, but for those that do, it can be very effective.

Gifting Has Negative Tax Consequences

Gifting eliminates the opportunity of stepped-up basis at death.  This important concept of stepped-up tax basis at death is a tremendous financial benefit to the beneficiary receiving the asset from the estate.  Careful consideration should be given to this loss of stepped-up basis before a gifting strategy is implemented.  For more information on gifting and stepped-up basis, see the Gifting Assets Prior to Death publication available at farmoffice.osu.edu.

Seek Legal and Tax Advice

Making gifts, particularly large gifts, have significant legal and tax consequences.  Before implementing a gifting plan, be sure to consult with legal and tax advisors to explore all options and to understand the implications of different strategies.  While gifting may seem like a simple solution to estate taxes, gifting is often complicated and has complex legal and tax consequences that should be carefully considered.

Flyer for Food Business Central course with photo of female baker and link to course
By: Peggy Kirk Hall, Friday, February 23rd, 2024

Are you a baker ready to sell your home-baked goods? Are you a farmer looking for value-added opportunities for crops you’ve grown or livestock you've raised? Are you an entrepreneur aiming to use local agricultural products to make value-added foods?

If you’ve answered yes to any of these questions, then the new Food Business Central online course can equip you with knowledge and strategies to launch a successful farm-raised or home-based food business in Ohio.

Navigating food regulations, establishing a new business, and applying best practices for food safety can be challenges for food entrepreneurs. This course is designed to serve as a centralized hub to connect you to information and resources regarding all types of food products you might want to make and sell.

We're part of the teaching team that created the course, which also includes Emily Marrison, OSU Family & Consumer Sciences Educator, Nicole Arnold, OSU Food Safety State Specialist,and Garth Ruff, OSU Field Specialist in Beef Cattle and Livestock Marketing. Our goal is to help food business entrepreneurs start off organized, safe, compliant, and strategic. The self-paced course asks key questions with considerations to explore and actions to take on your journey to start a food business. The cost of the course is $25, and registration is at go.osu.edu/foodbusinesscentral .

The  Food Business Central online course was partly funded through North Central Extension Risk Management Education, whose goal is to help farmers and ranchers effectively manage risk in their operations. This assistance comes from the United States Department of Agriculture through the National Institute of Food and Agriculture.

 

By: Peggy Kirk Hall, Wednesday, February 14th, 2024

As we enter the 2024 crop season, it's time for an update on economic and legal information that affects Ohio farmland leasing. Join our Farm Office team members on March 1, 2024 from 10 a.m. until noon for a special edition of our Farm Office Live webinars.  In the Ohio Farmland Leasing Update, we'll share the latest information on these leasing topics:

  • Cash Rent Outlook – Key Issues and Survey Data
  • Negotiating Capital Improvements on Leased Farmland
  • Dealing with Conservation Practices in a Farmland Lease
  • Executing and Recording Farm Leases
  • Legal updates and new Farmland Leasing Resources

Our speakers for the webinar include:

  • Barry Ward, Leader, OSU Production Business Management
  • Peggy Hall, Attorney, OSU Agricultural & Resource Law Program
  • Robert Moore, Attorney, OSU Agricultural & Resource Law Program

There is no cost to attend the Ohio Farmland Leasing Update, but registration is necessary unless you're already registered for our Farm Office Live webinars.  To register, visit go.osu.edu/register4fol.

 

By: Barry Ward, Wednesday, February 07th, 2024

Barry Ward, Leader, Production Business Management

Large increases in the Current Ag Use Value (CAUV) of farmland throughout Ohio in 2023 has resulted in higher property taxes (some have seen significant increases) for farmland owners in 2024. Forty-one of Ohio’s eighty-eight counties will see property tax increases in 2024 due to higher CAUV. Several factors have led to this increase in ag use valuation.

The Current Agricultural Use Value (CAUV) Program is a differential real estate tax assessment program for owners of farmland. The program allows for the farmland parcels to be taxed according to their use value in agriculture (or their value related to income from agriculture) rather than the market value (defined as the value if the land were sold by a willing seller to a non-related willing buyer). To arrive at this “use value”, a formula is used that includes several variables to capitalize the net income from agricultural products.

Landowners with farmland and woodlands in Ohio are eligible to sign-up for the CAUV program through their county auditor’s office if they meet the requirements.

There are two paths for a parcel to qualify for the Current Agricultural Use Valuation (CAUV) Program. To qualify for CAUV, land must meet one of the following requirements during the three years preceding an application.

•             Ten or more acres must be devoted exclusively to commercial agricultural use; or

•             If under ten acres are devoted exclusively to commercial agricultural use, the farm must produce an average yearly gross income of at least $2,500.

Each of the approximately 3500 different soil types in Ohio is assigned a CAUV value each tax year. The value represents the expected net present value of an acre of land devoted solely to agricultural production for the dominant field crops in Ohio. To determine this value, an average of yields and prices for corn, soybeans, and wheat is used to determine gross income. Non-land costs are then subtracted from gross income for a measure of net income. Finally, this net income is divided by a capitalization rate based upon recent values of farm interest and equity rates.

Large increases in the Current Ag Use Value (CAUV) of farmland in Ohio in 2023 has resulted in higher property taxes (some have seen significant increases) for farmland owners in 2024. Counties are subject to an update in CAUV every 3 years so only a portion (41 of the 88 Ohio counties) have been updated in 2023 that have impacted 2024 property taxes. As counties see updated values only every three years, there is the opportunity for large changes as many farmland owners will see this year.

Several factors have led to much of this increase in ag use valuation. Higher crop market prices and increased crop yields included in the formula have been significant drivers in the higher current ag use values. Price increases have been substantial as compared to the prices used in the 2020 calculations.

Corn price increased 16%, soybean price increased 12% and wheat price increased 7.4%. Yields used to determine values for each soil type increased 7.3% for corn, 5.4% for soybeans and 7.2% for wheat as compared to the yields used for the 2020 calculations. These are substantial increases in both prices and yields in an historical context.

Low interest rates (capitalization rate) have also contributed to the increasing current ag use values as recent higher interest rates aren’t yet fully represented in the formula. The capitalization rate used in the formula in 2023 CAUV calculations was 8.0% as compared to the rate of 7.9% used in 2020, the last time these counties saw an update in CAUV. Recent higher interest rates will increase the capitalization rate (denominator in the CAUV calculation) in future years which will likely help to moderate current ag use values.

For a detailed look at the variables and calculations that are used to determine CAUV for farmland, access the Ohio Department of Taxation online publication “2023 Current Agricultural Use Value of Land Tables Explanation of the Calculation of Values for Tax Year 2023”.

The Ohio Department of Taxation annually publishes this explanation of the CAUV valuation method complete with the measures used to calculate CAUV and examples of the calculations for certain soil units for the present year. This year’s document is titled “2023 Current Agricultural Use Value of Land Tables Explanation of the Calculation of Values for Tax Year 2023” and is available online at:

https://tax.ohio.gov/government/real-state/cauv

 

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By: Robert Moore, Monday, February 05th, 2024

Legal Groundwork

For many family farms, Long-Term Care (LTC) costs are the biggest threat to the future viability of the farm.  Nursing homes can cost well over $100,000 annually and about 20% of people who require LTC will need it for five years or more.  While there are no easy solutions to the LTC issue, there are strategies that can be implemented to lessen the risk of LTC on the family farming operation.

On February 20, the OSU Agricultural and Resource Law Program, PA Farm Link and the National Agricultural Law Center will be offering a webinar to discuss LTC issues for farms and the strategies available to them.  Topics that will be covered include:

  • Costs for LTC
  • LTC statistics
  • Practical insights from an experience Care Manager who has helped families determine their LTC needs
  • Developing a LTC risk assessment and applying it to your specific situation
  • Strategies to reduce the risk of LTC costs
  • Reviewing the LTC risk calculator application

The webinar will be held from 7:00 – 9:00 (EST).  The webinar is free but registration is required.  For more information and registration, go to https://farmoffice.osu.edu/long_term_care .

 

Calf standing in the snow
By: Jeffrey K. Lewis, Esq., Tuesday, January 30th, 2024

Happy 2024! We hope your new calendar year has gotten off to a delightful start. As we close out the first of twelve months, we bring you another edition of the Ag Law Harvest. In this blog post, we delve into the intricate world of employment contracts and noncompete agreements, classifying workers as independent contractors or employees, Ag-Gag laws, and agricultural policy. 

Ohio Man Violates Employer’s Noncompete Agreement. 
Kevin Ciptak (“Ciptak”), an Ohio landscaping employee, is facing legal trouble for allegedly breaching his employment contract with Yagour Group LLC, operating as Perfection Landscapes (“Perfection”). The contract included a noncompete agreement, which Ciptak is accused of violating by running his own landscaping business on the side while working for Perfection. Perfection eventually discovered the extent of Ciptak’s side business, leading to Perfection filing a lawsuit.

During the trial, Ciptak testified that Perfection was “too busy” to take on the jobs he completed. Additionally, Ciptak stated that the profits from his side jobs amounted to over $60,000. Perfection countered that they would have been able to perform the work and, because of the obvious breach of the noncompete agreement, Perfection lost out on the potential profits. The trial court ruled in favor of Perfection, ordering Ciptak to pay the $60,000 in profits along with attorney's fees and expenses, exceeding $80,000. Ciptak appealed, arguing that, according to Ohio law, Perfection could only recover its own lost profits, not Ciptak's gains from the breach. He also claimed that Perfection was not harmed as they were "too busy," and Perfection failed to provide evidence of lost profits. 

The Eighth District Court of Appeals ultimately found in favor of Perfection.  The court reasoned that “[t]his case came down to a credibility determination.” The court held there was no dispute that Ciptak had violated the noncompete agreement. What was in dispute was whether Perfection could have and would have performed the work. The Eighth District held that the trial court’s finding that Perfection could have performed the work was not unreasonable. The Eighth District noted that although Ciptak claimed that Perfection was “too busy” to do any of those jobs, Ciptak “provided no other evidence to support this assertion.” The Eighth District ruled that the evidence presented at trial showed that Perfection would have realized approximately the same amount of profit on those jobs as Ciptak did and, therefore, Perfection was damaged as a result of Ciptak’s breach of the noncompete agreement. 

New Independent Contractor Rule Announced by Department of Labor. 
The U.S. Department of Labor (“DOL”) has published a final rule to help employers better understand when a worker qualifies as an employee and when they may be considered an independent contractor. The new rule gets rid of and replaces the 2021 rule. As announced by the DOL, the new rule “restores the multifactor analysis used by courts for decades, ensuring that all relevant factors are analyzed to determine whether a worker is an employee or an independent contractor.” Thus, the new rule returns to a “totality of the circumstances” approach and analyzes the following six factors: (1) any opportunity for profit or loss a worker might have; (2) the financial stake and nature of any resources a worker has invested in the work; (3) the degree of permanence of the work relationship; (4) the degree of control an employer has over the person’s work; (5) whether the work the person does is essential to the employer’s business; and (6) the worker’s skill and initiative. The new rule goes into effect on March 11, 2024. 

Federal Appeals Court Reverses Injunctions on Iowa “Ag-Gag Laws.” 
On January 8, 2024, the U.S. Court of Appeals for the Eighth Circuit issued two opinions reversing injunctions against two Iowa “ag-gag laws”. At trial, the two laws were found to have violated the First Amendment of the United States Constitution. In its first opinion, the Eighth Circuit Court of Appeals analyzed Iowa’s “Agricultural Production Facility Trespass” law which makes it illegal to use deceptive practices to obtain access or employment in an “agricultural production facility, with the intent to cause physical or economic harm or other injury to the agricultural production facility’s operations . . .” The Eighth Circuit found that the intent element contained within the Iowa law prevents it from violating the First Amendment. The court reasoned that the Iowa law “is not a viewpoint-based restriction on speech, but rather a permissible restriction on intentionally false speech undertaken to accomplish a legally cognizable harm.” 

In its second opinion, the Eighth Circuit reviewed an Iowa law that penalized anyone who “while trespassing, ‘knowingly places or uses a camera or electronic surveillance device that transmits or records images or data while the device is on the trespassed property[.]’” The court found that the Iowa law did not violate the First Amendment because “the [law’s] restrictions on the use of a camera only apply to situations when there has first been an unlawful trespass, the [law] does not burden substantially more speech than is necessary to further the State’s legitimate interests.”  The court noted that Iowa has a strong interest in protecting property rights by “penalizing that subset of trespassers who – by using a camera while trespassing – cause further injury to privacy and property rights.” 

Both cases have been remanded to the trial courts for further proceedings consistent with the forgoing opinions. 

USDA Announces New Remote Beef Grading Program.
Earlier this month, the U.S. Department of Agriculture (“USDA”) announced a new pilot program to “allow more cattle producers and meat processors to access better markets through the [USDA’s] official beef quality grading and certification.” The “Remote Grading Pilot for Beef” looks to expand on the USDA’s approach to increase competition in agricultural markets for small- and mid-size farmers and ranchers. The pilot program hopes to cut expenses that otherwise deter small, independent meat processors from having a highly trained USDA grader visit their facility. 

Under the pilot program, trained plant employees capture specific images of the live animal and the beef carcass. These images are then sent to a USDA grader that will inspect the images and accompanying plant records and product data, who then assigns the USDA Quality Grade and applicable carcass certification programs. The “Remote Grading Pilot for Beef” is only available to domestic beef slaughter facilities operating under federal inspection and producing product that meets USDA grading program eligibility criteria. More information can be found at https://www.ams.usda.gov/services/remote-beef-grading

USDA Accepting Applications for Value-Added Producer Grants Program. 
On January 17, 2024, the U.S. Department of Agriculture (“USDA”) announced that it is “accepting applications for grants to help agricultural producers maximize the value of their products and venture into new and better markets.” These grants are available through the Value-Added Producer Grants Program. Independent producers, agricultural producer groups, farmer or rancher cooperatives, and majority-controlled producer-based business ventures are all eligible for the grants. The USDA may award up to $75,000 for planning activities or up to $250,000 for working capital expenses related to producing and marketing a value-added agricultural product. For more information, visit the USDA’s website or contact your local USDA Rural Development office.

 

Tractor pulling wagon of grain across beanfield at sunset.

Written by David L. Marrison, Professor & Field Specialist in Farm Management, OSU Extension

“I guess it comes down to a simple choice, really. Get busy living or get busy dying.” This famous line was quoted by Andy Dufresne, played by Tim Robbins, in the iconic movie titled “The Shawshank Redemption” released in 1994.

As we each traverse through our lives, we all are presented with moments that make us pause and reflect on how precious the time is we have been given here on earth. Every time I watch The Shawshank Redemption, I pause and think of the deeper message in this line:  that life can be spent going through the motions and waiting around for something to happen or you can make something happen.

As we look at developing a plan for transitioning the farm to the next generation, are we waiting around for something to happen? Or will we work to make something happen? As farmers, we have to contend with and solve the day-to-day problems which arise on the farm. And there is never a shortage of problems that arise. Because of this, the time for deeper planning functions such as farm transition planning is often pushed down the to-do list.  So, what will be the trigger to make something happen with regards to your succession plan?

What will be your trigger?

One of the hypothetical questions we pose in farm succession workshops is, “What knowledge would you need to pass on if you knew you had only two months to live?” This exact scenario happened to our family in 2010 when my father was diagnosed with pancreatic cancer just as we entered into Spring planting season on our dairy farm in northeast Ohio. 

My father valiantly battled this disease but passed away seven weeks later. Our family learned a lot and had to scramble to manage the farm in the midst of his illness. I am grateful for the short time we had with my dad to make preparations. But it was not long enough to learn everything we needed to know to run the farm without him.

I challenge you to think how your farm and family would react to the loss of the principal operator.  What knowledge and skills need to be transferred to the next generation so they can be successful without you? What can you do today to make something happen?

Who Will Manage the Farm in the Future?

As you develop your succession or transition plan, there are a myriad of decisions to be made. These decisions include identifying the next leader/manager of the farm, how to be fair to off-farm heirs without jeopardizing the future of the on-farm heirs, how to distribute assets through the estate plan, how and when the senior generation will retire, and how the business will deal with unexpected issues such as divorce, disability or paying for nursing home expenses. I would contend that the most crucial planning functions are to identify the next manager of the farm and then strategically plan how to develop them to lead the farm in the future.

The first step is to identify who the next leader or leaders of the farm will be. The next generation could be an immediate family member (son, daughter, grandchild) or extended family member (brother, sister, niece, nephew). With that said, the next leader does not have to be from your family as some farms have transitioned successfully to a non-blood friend or neighbor. The key is to choose a successor who will be the best caretaker of the farm and the land they will be entrusted with.

As you review potential managers and heirs to your farm, it is important to talk with them about their vision for the future and how it aligns with the current farming operation. What are their goals and aspirations for the farm? What concerns do they have about the future of the farm? 

Complete a skills assessment with each potential heir/manager to examine their current strengths and which areas they will need to receive training in order for them to be a better leader for the farm in the future. Talk with them to learn more about what they would be most concerned or scared about if they had to take over the farm today. Are there additional responsibilities they would like to assume and what is their expectation for an appropriate time for management control to be transferred?

The new manager should have experience with how other farms are operated. Having the future manager work on another farm prior to returning to the home farm is a valuable experience. Mentor relationships should also be developed for the new manager to have a trusted team to help them grow.

Putting the Transition into Motion

The transition can be accomplished gradually by turning over more responsibility and authority to the successor.  In fact, this process may (and should) take 5-10 years. It is important to develop a timeline for transferring ownership, management responsibilities, and knowledge from one generation to the next.

As the senior generation transitions their role and responsibilities to the next generation, thought should be given to the overall labor hours which will be available. In some cases, the responsibilities of two members of the senior generation will be transitioned to a single successor. Think of husband/wife combination transitioning to one of their children. This could cause a labor shortage. Could some tasks be outsourced to independent contractors (like accountants)? Can some production practices be accomplished through custom hire arrangements (silage harvest or cattle breeding)?

The biggest task in the transition plan is making sure the next generation has a firm foundation of knowledge to manage the operation in the future. This will look different for each farm and for the type of manager that is needed.

Owner-Operator. If the next manager is going to be an owner-operator, then training will need to include how to manage all aspects of the farm. These include production skills to raise livestock and/or crop enterprises and marketing skills to effectively market each commodity produced. The owner-operator will also need financial skills to manage the operation’s finances and taxes and human resource skills to manage employees. Additionally, they will need to know how to maintain facilities, tools, and equipment as well as how to manage risk through crop, livestock, and farm insurance.

Owner-Landlord. To the contrary, if the next manager will be more of an owner-landlord, they will need to be trained less on the day-to-day production activities and more on how to manage the farm asset. Some skills which are necessary for landlords include tenant and farm rental management, farm finance and tax management, farm insurance decision making, and facilities and other farm assets maintenance.

Strategies recommended for farm businesses to utilize in the transition process are:

  • Every person who is part of the business (family member and employees) should have a written job description which includes job duties, responsibilities, and expectations.
  • Create an organization chart of all employees and how each employee relates to one another.
  • Develop a timeline for the successor to work through each job description on the farm. It is good to start the new family member as an employee and not the top manager.
  • Provide meaningful opportunities for decision-making as well as accepting responsibility for the future manager.
  • Develop a plan on how the future manager can increase their equity in the farm business through gifting, purchasing or inheritance.
  • Develop a timeline for retirement and managerial transfer from senior generation to the succeeding generation.
  • Utilize family business meetings to discuss the transfer and changing roles within the business.

Some experts advise that the current manager take a number of planned absences before retiring to provide an opportunity for the successor to see what it is like to manage the business alone. This will also allow the current manager to see that the farm does not fall apart without them. So how do you know if the next generation is ready?  There are two other approaches which you can use to help prepare the next generation to lead without you:  

Opossum Approach. Just as an opossum plays dead, so too should the principal operator.   Take an unannounced week away from the farm during one of the busiest times of the year for your farm and allow the junior generation to take over with no communication from the senior generation.  I know this sounds crazy but how else will you know what knowledge and skills need to be transferred?  It is a lot easier to come back after a short vacation and be able to answer the questions your son or daughter has.  You won’t have this opportunity when you pass away.

365-Day Challenge.  Outside of using the opossum approach, it should be the goal of the senior generation to transfer at least one knowledge point or skill to the next generation each day. So, by the end of the year, your heirs will have 365 new tools in their management toolbox. If you do this over the next five to ten years, you can teach your heirs an incredible amount.

Take Advantage of OSU Extension Workshops

Attend one of our Planning for the Future of Your Farm” workshops this Winter to learn about the communication and legal strategies that provide solutions for dealing with farm transition needs and decision making.  A webinar version and several in-person options for the workshop are being offered.

Webinar version.  You and your family members can attend the workshop individually and online from the comfort of your homes. The four-part webinar series will be February 5, 12, 19, and 26, 2024, from 6:30 to 8:30 p.m. via Zoom. Pre-registration is required so that a packet of program materials can be mailed in advance to participating families. Electronic copies of the course materials will also be available to all participants. The registration fee is $75 per farm family.  Register by February 2, 2024 to receive course materials in time. Register on this page.

In-person workshops.  Our local Extension Educators are hosting in-person workshops at five regional locations across Ohio. Registration costs vary by location due to local sponsorships. 

More information about our Planning for the Future of Your Farm workshops is available at: go.osu.edu/farmsuccession.

Final Thoughts

So, are you ready “to make something happen” to transition your farm to the next generation?  Farm managers are encouraged to think about how the next generation can be prepared to lead the farm in the future.  And as Andy Dufresne stated in The Shawshank Redemption, “remember, hope is a good thing, maybe the best of things, and no good thing ever dies.”  Good luck as you plan for the future of your farm!

By: Robert Moore, Thursday, January 18th, 2024

Legal Groundwork

Managing the inherent risks of a farm is a top priority for most farm managers.  The challenge for those managers is how best to manage the risks.  We often are encouraged to invest in liability insurance or establish a business entity such as an LLC.  The question becomes: is one better than the other and do we need both?

For most legal questions, the answer is “it depends on the situation.”  However, regarding farm insurance, the answer is a definite “yes, you need good liability insurance.”  Farm liability insurance is the best, most cost-effective liability management strategy for a farming operation. Insurance should always be the primary risk management tool with a business entity being the backup plan. Before spending time and money on setting up a business entity, make sure the farm’s liability insurance policy has adequate coverage limits and protects all the farm’s activities and assets.

There is no precise answer as to how much liability insurance a farm should carry.  For farms with higher risk exposure like customer visitors or trucks and large machinery frequenting roadways, the coverage limit should be higher.  Smaller farms with less liability exposure may need a smaller coverage limit.  Every farm should probably have at least $1 million in liability coverage.  A coverage limit of $3 million to $5 million is probably better for farms with moderate liability exposure.  Farms with high liability exposure for visitors or trucks/equipment may want $5 million or more in coverage.  With liability insurance, more is better although the premium costs must be considered.  Liability insurance is relatively low-cost compared to the protection it provides.  The best solution is to talk to the insurance agent to determine the best coverage limits for the specific farming operation.

When discussing the liability insurance policy with the insurance agent, it is vital to make sure the agent is aware of all activities and assets on the farm.  If the agent does not know about it, the activity or asset might not be covered.  For example, farmers who lease their land for hunting may not be covered by a typical farm policy for injuries to hunters.  To address issues like this, a checklist of unique farm activities and assets has been developed and is available here.  Each activity and asset that applies to the farming operation should be checked and the completed list provided to the insurance agent.  The agent can them make sure that all activities and assets are covered.

For a more thorough discussion on farm insurance, see the Farm Insurance: Covering Your Assets Bulletin available at farmoffice.osu.edu.

After ensuring an adequate liability insurance policy is in place, focus can then turn to a business entity.  Whether a business entity is needed in addition to the insurance depends on the situation.  Generally, a business entity will help provide backup liability protection if the business has any of the following:

  • Multiple owners;
  • Employees;
  • Many visitors;
  • External liability exposure such as food safety or product liability.

If none of the above factors apply to a farming operation, a business entity might have limited value for liability protection.  The reason is if a liability issue occurs, the owner of the business will have caused it.  The business owner will likely be personally liable regardless of what type of business entity they may have.

Consider the following examples:

Example 1.  Farmer is a sole proprietor with no employees.  He only occasionally receives help from family members.  If a liability incident happens with machinery on the roadway, Farmer will likely to have caused it.  Farmer will be personally liable.   Even if Farmer had an LLC, Farmer would still be personally liable because they caused the liability incident. Farmer’s best liability protection is liability insurance. 

Example 2. Farmer adds a full-time employee to help on the farming operation and continues to operate as a sole proprietor.  If employee has a liability incident while driving equipment, Farmer will probably be fully liable for employee’s actions.  Under Ohio law, an employer is liable for an employee’s actions during the course of work.  Again, Farmer’s only protection is insurance.

Example 3. Farmer establishes an LLC for his farming operation when they hire the employee.  Now, the LLC is the employer, not Farmer.  When the employee has an incident driving the machinery, the LLC is liable for the employee, not Farmer.  All of Farmer’s assets outside of the LLC are safe because Farmer is not personally liable.  The LLC may be liable and the assets in the LLC are still at risk, but the LLC contains the employee’s liability to only the LLC. 

As these examples show, the utility of a business entity to provide liability protection depends on the situation.  In some cases, the business entity will provide little protection while in other cases, the entity will provide significant protection.  The best course of action is to consult with an attorney to determine the best strategy for a particular situation. 

The type of entity used also affects the protection provided.  A general partnership provides no liability protection and a limited partnership provides some, but not complete, liability protection.  An LLC or corporation are the best entities to use for liability protection.  For a detailed discussion on business entities and liability protection, see the Using Business Entities to Manage Farm Liability Risk Bulletin available at farmoffice.osu.edu.

To summarize, let’s go back to the original question: do you need liability insurance, a business entity or both?  There is no doubt every farm should have liability insurance.  Working closely with the insurance agent to ensure that all activities and assets are covered is a goal that every farm should have.  Business entities can provide a good backup plan but, in some situations, may only provide limited protection.  So, it depends on the situation as to whether a business entity is needed.  Consulting with an attorney is the best way to determine if a business entity is a good choice.

Farm Office Live dates for 2024
By: Peggy Kirk Hall, Wednesday, January 17th, 2024

Join us for our monthly Farm Office Live webinar to hear timely updates on farm management and legal issues affecting Ohio agriculture.  The webinar is this Friday, January 19 from 10--11:30 a.m.  Here's our January line-up of topics:

  • Production and Accounting Goals -  Bruce Clevenger, Farm Management Field Specialist

  • Farm Financial Business Analysis Program Update - Clint Schroeder, Program Manager

  • Grain Marketing Update - Seungki Lee, Asst. Professor, OSU Dept. of Agricultural, Environmental & Development Economics

  • The new Ohio Farm Resolution Services Program - Peggy Hall, Director, OSU Agricultural & Resource Law Program 

  • Solar Development in Ohio Update - Peggy Hall and Eric Romich, Energy Education Field Specialist 

Register for this Friday's and future Farm Office Live webinars through this link.  Can't make it this Friday?  We record all of our Farm Office Live webinars, and the recordings are available on the Farm Office website.

 

Posted In: Business and Financial
Tags: Farm Office Live
Comments: 0
By: Robert Moore, Thursday, January 11th, 2024

Legal Groundwork

On January 1, 2024, The Corporate Transparency Act (CTA) took effect with the primary purpose of combatting money laundering, illicit financial transactions, and financial terrorism. The CTA established the Financial Crimes Enforcement Network (FinCEN) in the U.S. Department of Treasury to oversee a national registry of information on owners of entities that are exempt from conventional disclosure regulations. The CTA requires many businesses formed or operating in the United States to report information about their “beneficial owners” to FinCEN. This new law will affect many farms and small businesses.

Any entity that is required to be registered with the Ohio Secretary of State will be considered a Reporting Company and subject to the CTA.  Generally, this means LLCs, corporations and limited partnerships, common entities for farms, are all subject to the CTA.  There are some types of businesses that are exempt from the CTA, such as banks and accounting firms, but farms are not exempt.

The CTA primarily targets small businesses. Therefore, an exemption is provided for large operating companies.  Companies that meet the following conditions are exempt from the CTA reporting requirements:

  1. employs more than 20 fulltime employees in the United States
  2. has an operating presence at a physical office within the United States; and
  3. Filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5M in gross receipts or sales.

Every Reporting Company must provide FinCEN with information for each and every beneficial owner of the business.  A beneficial owner is any owner that exercises substantial control or owns at least 25 percent of the business.  The information required for each beneficial owner is as follows:

  • Full legal name.
  • Date of birth.
  • Complete current address.
  • Unique identifying number and issuing jurisdiction from one of the following, along with its image:
    • U.S. passport.
    • State driver’s license.
    • Identification document issues by a state, local government or tribe.

Each Reporting Company must submit an initial filing but also must update the filing if there is any change to the required information about the business or beneficial owners.  For example, if a beneficial owner has a change of address or obtains a new driver’s license, the Reporting Company must update the report with FinCEN.  Both the initial report and updates are filed though the FinCEN website portal at www.fincen.gov/boi

So, what does this all mean for farm businesses?  The CTA and beneficial owner reporting requirements may seem like an intrusion of privacy. It is, in fact, an intrusion of privacy, but Congress has determined that the intrusion is necessary to protect against money laundering, illicit financial transactions, and financial terrorism. Right or wrong, the CTA is now law and farm businesses must follow it to avoid penalties.

The process of reporting should not be overly difficult using the FinCEN online portal. But the reporting will take time, especially for entities with many owners. While the entity should already have each owner’s name, address, and ownership percentage, collecting an image of each owner’s identification document could be time consuming. All businesses required to report under the CTA should develop a plan to file the initial report, monitor reportable changes, and file updated reports. Attorneys, accountants, lenders, and other professionals working with farms should also help remind their clients of the need for the initial reporting and future, updated reports. The CTA reporting is a significant change in business entity management and it may take the entire business team to ensure compliance.

For more information and a detailed discussion of the CTA, see The Corporate Transparency Act: Reporting Requirements law bulletin available at farmoffice.osu.edu.

 

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