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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.

 

Webinar title with storm clouds and lightning over a farm field
By: Peggy Kirk Hall, Friday, January 05th, 2024

Are your farm business assets adequately protected against risk?  Our webinar on farm insurance, an excellent tool for protecting your assets, can help you answer that question.  Join us for Covering Your Assets: Understanding the Basics of Farm Insurance on January 11, 2024 from 7-9 p.m.  Sponsored by OSU's Agricultural & Resource Law Program and the National Agricultural Law Center, the webinar aims to help you ensure that your insurance best protects you and your farm business.

Topics we'll cover in the webinar include:

  • Who should be insured?
  • How much coverage do you need?
  • Updating asset inventories
  • Contractual duties of carriers
  • Are casual employees covered?
  • Business entities and insurance
  • The claims process
  • Appealing a claim determination
  • Working with your agent

Webinar speakers are the authors of our publication on farm insurance, Covering Your Assets, and include:

  • Robert Moore, Attorney, OSU Agricultural & Resource Law Program.
  • Jeff Lewis, Attorney, OSU Agricultural & Resource Law Program, also previously an insurance defense attorney.
  • Samantha Capaldo, Staff Attorney, National Agricultural Law Center, also previously an insurance agent.

The webinar is free, but registration is necessary!  Register at https://farmoffice.osu.edu/farminsurance.

 

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Posted In: Business and Financial
Tags: farm insurance
Comments: 0
Photo of farm field, blue sky and sunshine with Beginning Farmer Tax Credit heading
By: Peggy Kirk Hall, Wednesday, January 03rd, 2024

Ohio's Beginning Farmer Tax Credit Program aims to help level the playing field for beginning farmers in Ohio. It does so by providing income tax benefits for both a beginning farmer and someone who transfers farm assets to the beginning farmer.  The new program first became available for the 2023 tax year, and sunsets on January 1, 2028, or when total income tax credits granted amount to $10 million. Participating in the program requires good planning, so now is the optimal time for existing and beginning farmers to consider how best to utilize the program while program funds are still available.

Our law bulletin, Ohio's Beginning Farmer Tax Credit Program, can help guide planning efforts.  The bulletin explains how the program works and outlines the process for qualifying for the program's income tax credits.  That process includes:

1.  Meeting eligibility requirements to become certified by the Ohio Department of Agriculture (ODA) as a "qualified beginning farmer."  The first step, then, is to determine whether an individual can meet the eligibility requirements, which are: 

  • A resident of Ohio.
  • Seeking entry to or has entered farming within the last 10 years.
  • Farming or intending to farm in Ohio.
  • Has a total net worth of less than $800,000 in 2021, including spouse and dependent assets, as adjusted for inflation each year.
  • Provides the majority of the daily physical labor and management for the farm.
  • Has adequate farming experience or knowledge in the type of farming the individual is conducting.
  • Submits projected earnings statements and demonstrates profit potential.
  • Demonstrates farming will be a significant source of income for the individual.
  • Is not a partner, member, shareholder, or trustee of the assets the individual is seeking to purchase or rent.
  • Completes an ODA-approved financial management course.

2.  Completing training and applying to ODA for certification as a "qualified beginning farmer."  One component of attaining the program's eligibility requirements is completing a financial management course, which an individual who meets all other program requirements must do before applying to ODA to become certified. OSU Extension offers two of the 12 ODA-approved financial management programs an individual can complete to meet the training requirement. 

  • After completing an eligible financial management course, the individual must submit an application to ODA's Office of Farmland Preservation to be approved as a qualified beginning farmer.  The application requires submitting information and documentation showing that the individual meets the eligibility requirements. 
  • If ODA approves the application, the individual will receive a state income tax credit certificate for the amount paid for completing the financial management course.  The qualified beginning farmer can use the tax credit on the current year's tax return and can carry it forward for three succeeding tax years.
  • A list of eligible financial management courses and the application to become a qualified beginning farmer are on the ODA website at https://agri.ohio.gov/programs/farmland-preservation-office/Beginning-Farmer-Tax-Credit-Program.

3.  Transfer of agricultural assets to a qualified beginning farmer.  The program also creates a financial incentive for owners who sell or rent agricultural assets to an individual who has been certified as a qualified beginning farmer, as long as the beginning farmer is not a partner, member, shareholder, or trustee with the owner of the agricultural assets.  The asset owner will receive an Ohio income tax credit equal to 3.99% of the asset sale price or gross rental income received during a calendar year for a cash or share rental lease, and can carry the credit forward for up to seven years. 

  • "Agricultural assets" include land in agricultural production (10 or more or if under 10 acres, earning $2500 in average annual gross income from agriculture), livestock, facilities and buildings, and machinery (but not if the owner of machinery is an equipment dealer).
  • A sale of assets must occur in the same calendar year the owner applies for the tax credit.
  • In the case of a rental of assets, the credit can be claimed over the first three years of the lease.

4.  Application for a tax credit by the asset owner.   To receive the 3.99% income tax credit, the asset owner must submit a Beginning Farmer Tax Credit Asset Transfer Form application to ODA. The asset owner must submit a copy of the qualified beginning farmer's certification certificate with the application, which is available on the ODA website at https://agri.ohio.gov/programs/farmland-preservation-office/Beginning-Farmer-Tax-Credit-Program. If ODA approves the application, the Ohio Department of Taxation will issue a tax credit certificate to the asset owner.

It is important for both the beginning farmer and the agricultural asset owner to understand the process for qualifying for the income tax credits the new program offers.  Timing is critical, as the beginning farmer must complete the training and become certified as a qualified beginning farmer before a transfer of agicultural assets occurs.  It's also important for existing asset owners to coordinate program participation with estate and transition plans.  Now is the time to consult with professional advisors and begin planning for program participation for the 2024 tax year. 

Learn more about the Beginning Farmer Tax Credit Program in our law bulletin, available in the tax law library on https://farmoffice.osu.edu/our-library/tax-law and by visiting the ODA's website at https://agri.ohio.gov/programs/farmland-preservation-office/Beginning-Farmer-Tax-Credit-Program.

By: Robert Moore, Friday, December 15th, 2023

Legal Groundwork

Farms are subject to more risks than ever before. Whether it’s the liability exposure of driving equipment on roadways or the potential of property loss due to severe weather, every farm has multiple sources of risk. While farmers can reduce their risk exposure through good business practices and rigorous safety protocols, there is no way to entirely eliminate risks. For this reason, insurance policies that adequately protect against risks are a necessity for farm operations.

All farmers probably know the importance of insurance to protect their livelihood and their farm assets.  However, few farmers take the time to read and understand their insurance policy. The failure to read policies is not a result of apathy but more likely due to the almost unreadable nature of an insurance policy. Reading and understanding an insurance policy is very difficult for anyone other than those in the insurance industry.

The Ohio State University Farm Office in cooperation with the National Agricultural Law Center (NALC) is offering a webinar to help explain farm insurance policies and discuss important provisions to include the policies.  Robert Moore, attorney with OSU’s Agricultural and Resource Law Program, will host the webinar.  He will be joined by Samantha Capaldo and Jeff Lewis.  Samantha is an attorney with NALC and previously worked as an insurance agent.  Jeff is an attorney with OSU’s Farm Tax Program and previously worked in an insurance defense law firm.  Both Samantha and Jeff will provide practical and expert insight on farm insurance policies.  Participants can expect to gain a better understanding of their insurance policies and be better equipped to discuss the needs of their specific farming operation with their insurance agent.

The webcast will be held January 11, 2024, 7:00 – 9:00 EST.  For more information and free registration, visit farmoffice.osu.edu/farminsurance

Posted In: Business and Financial
Tags: farm insurance
Comments: 0
By: Robert Moore, Tuesday, December 05th, 2023

Legal Groundwork

Second marriages present unique challenges for farm transition planning. This is especially true when the second marriage occurs later in life and the spouses have accrued significant assets and/or have children from prior marriages. The spouses in a second marriage obviously want to help provide for each other but may have a competing interest of providing for their children but not necessarily stepchildren. Without good planning, it is possible that farm assets will end up with a spouse or stepchildren who were not involved in the farming operation.

Farm Transition Planning Strategies for Second Marriages, a new bulletin available at farmoffice.osu.edu, addresses the two most common sources of risk to farming operations when a second marriage is involved – death and divorce. While these risks cannot be eliminated, there are strategies to help minimize the risks to ensure, as best we can, that farm assets stay with the farm family. The bulletin discusses the strategies and how they can be integrated into a farm transition plan.

Strategies to protect farms from the death of a second spouse mostly involves incorporating a trust in the farm transition plan.  A trust can hold assets for the surviving spouse without giving legal ownership to the spouse.  The trust serves the dual purpose of providing  income and other resources for the surviving spouse while also protecting those assets to ultimately be inherited by the deceased spouse’s heirs.  Trusts are an excellent tool to both provide for spouses and protect assets for future generations.

Prenuptial and postnuptial agreements can be used to reduce the risks of divorce.  These agreements between spouses specifically identify which assets are considered joint, marital assets and which assets are to be considered outside of the marriage.  These designations can help safeguard farm assets by keeping them immune from a division of assets in a divorce.   A recent change in the law allows spouses to enter into such an agreement even after the marriage has occurred.

Any farmers who are in a second marriage should consider including a trust and/or pre/postnuptial agreement into their farm transition plan.  An attorney experienced in farm transition planning can assist with deciding if a trust or marriage agreement is needed and how best to integrate into a farm transition plan.  The Farm Transition Planning Strategies for Second Marriages bulletin provides a detailed discussion of trusts and marriage agreements and their potential impact on farm transition planning.

Ohio farm fields in fall with sun setting in background
By: Peggy Kirk Hall, Thursday, November 09th, 2023

The State of Arkansas made history last month when it took steps to enforce its new law restricting foreign ownership of land in the state.  Arkansas ordered Northrup King Seed Co., a subsidiary of Syngenta held by China-owned company ChemChina, to give up 160 acres of Arkansas farmland it owned.  The State also assessed a $280,000 fine against Syngenta for failing to disclose the land ownership. The actions are the result of a new foreign ownership law enacted by the Arkansas legislature earlier this year. 

Joining Arkansas and ten other states, Ohio also passed a law restricting foreign ownership of land earlier in 2023.  Ohio’s new “Save our Farmland and Protect our National Security Act” quietly became effective last month.  The law limits who can own agricultural land in the state and requires persons or entities who cannot own Ohio farmland to forfeit title to the property, which the State will then sell.  The purpose of the law, according to the legislature, is “to recognize that Ohio has substantial and compelling interests in protecting its agricultural production.”

Who the law restricts from owning agricultural land in Ohio

The law is not an absolute restriction on foreign ownership of land.  Instead, the law prohibits agricultural land ownership by any “person” listed on a registry compiled by Ohio’s Secretary of State.  A “person” can include an individual, firm, company, trust, business or commercial entity, organization, joint venture, non-profit, or non-U.S. government.  The prohibition applies not just to the person listed on the registry, but also to any agent, trustee, or fiduciary of the person.

The Ohio Secretary of State must compile the “registry” by identifying and including any person that constitutes a threat to the agricultural production of the state. To develop the registry, the Secretary of State must consult several federal sources, including the list of foreign adversaries, terrorist exclusion list, list of countries that have provided support for acts of international terrorism, and persons designated by two presidential Executive Orders.  In accordance with the law, Ohio’s Secretary of State has compiled the registry and published it online at https://www.ohiosos.gov/publicintegrity/save-our-farmland/.

Exceptions to the ownership restrictions

The ownership restriction does not apply to any agricultural land a person acquired before the act’s effective date of October 3, 2023.  There is also a limited exception that applies when a person on the registry recieves the land through inheritance, a gift, collection of a debt, a foreclosure, or enforcement of a lien on or after the law's effective date. In those cases, the person can recieve the land but must divest itself of the title and any interest in the land within two years of receiving it.  And while holding the land until divestiture, the person cannot use it for any purpose other than agriculture or lease it to any person on the registry.

Enforcement of the law

Enforcement involves both the Secretary of State and the Ohio Attorney General.  If the Secretary of State finds that a person listed on the registry has acquired title or an interest in land in violation of the law, the Secretary of State must report the violation to the Attorney General.  Others can report land ownership by a person on the registry via the Secretary of State’s web page for the registry, https://www.ohiosos.gov/publicintegrity/save-our-farmland/.

Upon learning of the violation, the Attorney General must initiate a legal action in the county where the land is located.  If the court agrees that the ownership violates the law, it shall file an order allowing the state to take ownership of the land and ordering the land to be sold at public auction, following required legal procedures.  Proceeds from the sale are to be applied first to any court costs and expenses, then to the registered person.  That amount is limited, however, to the actual cost paid by the registered person for the land.  If any sale proceeds remain, the funds are to be paid to the general fund of each county where the land is located, proportionate to the acreage in the county.

Learn more on our next Farm Office Live!

Join us on our next Farm Office Live webinar as we discuss Ohio’s new foreign ownership law and talk with Micah Brown, staff attorney with the National Agricultural Law Center, about foreign ownership restrictions in the U.S. and what they mean for agriculture.  The Farm Office team will also cover Using Charitable Remainder Trusts, Ohio’s Role in Organic Grain Production, Farm Business Analysis Update, and Farmer Mental Health Concerns and Resources. Farm Office Live takes place on November 17 at 10 a.m.-- registration is necessary at https://farmoffice.osu.edu/farmofficelive.

Read the primary provisions of Ohio’s Save Our Farmland and Protect Our National Security Act in Ohio Revised Code Section 5301.256. The Ohio Legislature enacted the law in House Bill 33, the biennial budget bill.

By: Robert Moore, Wednesday, November 01st, 2023

One of the primary challenges for a retiring farmer is the large tax burden that retirement may cause.  Throughout their farming careers, farmers do a good job of managing income taxes, in part, by delaying sales and prepaying expenses.  This strategy works well while the farm is operating but can cause significant tax liability upon retirement.  The combination of a large increase in revenue from the sale of assets and little or no expenses to offset the revenue can cause a retiring farmer to be pushed into high tax brackets.  It is not unusual for 40% or more of the sale proceeds from a retirement sale to go to taxes.  One strategy to reduce income tax liability at retirement is a Charitable Remainder Trust (CRT).  A CRT can be an effective way of managing income taxes at retirement, but it is not for everyone. 

A CRT is a charitable trust because at least some of the assets in the CRT must eventually pass to a qualified U.S. charitable organization such as a church or 501(c)(3) corporation.  This charitable nature of the CRT is central to the CRT strategy.  As a charitable trust, the CRT may sell assets without paying tax on the sale.  So, instead of the retiring farmer selling assets in their own name, they donate the assets to the CRT and then the CRT sells the assets.  The retiring farmer then receives an income stream from the CRT.  After a period of time, the income stream stops and the remaining trust assets are contributed to the named charity.  The following are the steps of the CRT strategy:

  1. Assemble a team of advisors and develop a CRT strategy.
  2. Donor establishes a CRT.  The trust document declares the income beneficiaries and the charitable beneficiaries. 
  3. Donor determines the assets to be contributed to the CRT.
  4. Donor contributes assets into the CRT, typically grain, machinery and/or livestock.
  5. The CRT sells the assets but does not pay tax.
  6. The Trustee of the CRT uses the sale proceeds to establish an annuity.  The annuity must be designed to provide at least 10% of the sale proceeds to the charity.
  7. The annuity pays out to the Donor over a number of years.  The Donor pays income tax on the annuity distributions.
  8. When the trust is terminated, the charity is paid the remaining assets.

Consider the following example to help further explain how a CRT strategy works:

Farmer decides to retire at the end of the 2023 crop year.  After harvesting the 2023 crop, Farmer owns $1 million of grain and $1.5 million of farm equipment.  Farmer’s accountant tells him that if he sells all the grain and machinery in one year, he will pay around $1 million in taxes. Farmer decides to implement the CRT strategy.  He establishes a CRT and names himself and his spouse as the income beneficiaries and the local children’s hospital as the charitable beneficiary.  Farmer transfers his grain and machinery into the CRT.  The CRT sells the grain and machinery and receives $2.5 million in sale proceeds. 

The CRT establishes an annuity that will pay out $125,000 for the next 20 years.  Farmer pays income tax on each $125,000 payment which results in $20,000 of annual income taxes.  After 20 years, the trust is terminated, and the children’s hospital receives the remaining funds in the CRT.  

As the example shows, the strategy avoids a large, up-front tax payment in the year of the asset sale.  Farmer pays taxes on each annual $125,000 payment which allows him to stay in a lower tax bracket.  In the example, instead of paying $1 million in taxes in 2023, Farmer spreads the payments out and ultimately pays $400,000 over 20 years.

The primary disadvantage of a CRT is that it is an irrevocable trust.  Once the CRT is set into motion, it cannot generally be undone.  A CRT may not be the best option for farmers who wish to keep flexibility with managing their assets or who are transitioning the farming operation to family members.  While a CRT provides many tax and business benefits, it is not an adaptable plan that can be changed in the future.

Another disadvantage of a CRT is the cost.  It is usually a rather complicated process to establish the trust, calculate the potential tax savings, file a tax return, and establish an annuity.  Legal and other professional fees will often be tens of thousands of dollars. It is important early in the planning process to weigh the potential tax savings against the cost of establishing the CRT.

For more information on CRTs, see the newly published bulletin Charitable Remainder Trusts as a Retirement Strategy for Farmers available at farmoffice.osu.edu.  This bulleting provides details on how a CRT strategy is implemented and its advantages and disadvantages.  Be sure to consult with an attorney, tax advisor and financial advisor before deciding on a CRT for your retirement strategy.

Combine in the field.
By: Jeffrey K. Lewis, Esq., Friday, October 27th, 2023

Agricultural & Natural Resources Income Tax Issues Webinar
Barry Ward, Director, Income Tax Schools at The Ohio State University
Jeff Lewis, Income Tax Schools at The Ohio State University

Tax practitioners, farmers, and farmland owners are encouraged to connect to the Agricultural and Natural Resources Income Tax Issues Webinar (via Zoom) on December 13 from 8:45 a.m. to 3:20 p.m. The event is sponsored by Income Tax Schools at The Ohio State University.

The webinar focuses on issues specific to farm tax returns related to agriculture and natural resources and will highlight timely topics and new regulations.

The program is an intermediate-level course for tax preparers whose clients include farmers and rural landowners. Farmers who prepare and file their own taxes will also benefit from the webinar.

Tentative topics to be covered during the Ag Tax Issues webinar include:

  • Timely Tax Issues Facing Agricultural Producers
    • Employee vs Independent Contractor
    • Cost-Sharing Exclusion
    • Farm Trade or Business
    • Farming S Corporations
    • Timber Taxation
  • Legislative and Regulatory Update
  • Form 1099s Requirements for Farmers and Ranchers
  • Tax Schemes Targeting the Farm 
  • Tax Issues Arriving at the Death of a Farmer
  • Ohio Tax Update

Other chapters included in the workbook not included in the webinar includes: Material Participation Rules for Farmers, Ranchers and Landowners, Livestock Tax Issues, Depreciating and Expensing Farm Assets, Sale and Exchange of Farm Property, Sample Tax Return.

The cost for the one-day school is $180 if registered by November 29th. After November 29th, the registration increases to $230. Additionally, the course has been approved for the following continuing education credits:

•          Accountancy Board of Ohio, CPAs (6 hours)

•          Office of Professional Responsibility, IRS (6 hours)

•          Supreme Court of Ohio, Attorneys (5 hours)

Registration includes the Agricultural Tax Issues Workbook. Early registration (at least two weeks prior to the webinar) guarantees that you’ll receive a workbook prior to the webinar. 

The live webinar will also feature options for interaction and the ability to ask questions about the presented material.

More information on the workshop, including how to register, can be found at: https://farmoffice.osu.edu/tax/2023-ag-tax-issues-webinar

Contact Barry Ward at ward.8@osu.edu or Jeff Lewis at lewis.1459@osu.edu

Three women holding sign saying "Ohio preserved farm" in front of field of corn.
By: Peggy Kirk Hall, Wednesday, October 25th, 2023

An agricultural easement is a legal instrument that can protect farmland from non-farm development and preserve the legacy of family land for the future. An earlier blog post explains how an agricultural easement works and answers common questions about agricultural easements.  As we explained, an agricultural easement not only preserves farmland but can also be a valuable financial and tax tool that can enable a transition of the farm to the next generation.  But are there drawbacks to agricultural easements?  Here's a summary of potential negative implications of easements that landowners should also consider.

It's difficult to forecast the future of a farm.  The very nature of the easement requires a best estimate of how the farmland might be used for agriculture into the future--a challenging task.  The Deed of Agricultural Easement the parties agree to must predict agricultural activities that are consistent with the easement and those that would violate the easement.  There could be future problems if the predictions and forecasting aren’t flexible enough to accommodate agriculture in the future. 

The “perpetuity” requirement. While it’s possible to draft an easement that lasts only for a certain term of years, most agricultural easements remain on the land “in perpetuity,” or permanently.  The programs that pay a landowner to grant an agricultural easement and the federal income and estate tax benefits for donating all or part of an easement require that the easement is perpetual.  This differs from the conservation programs we’re accustomed to in agriculture that require shorter term commitments, and it can be a deterrent to a landowner who wants future generations to have a say in what happens to the land.  These concerns might be addressed in the deed of agricultural easement, however, which may provide sufficient flexibility to address those future concerns.

Termination can be difficult and costly.  Hand in hand with the perpetuity issue is the difficulty of terminating an agricultural easement once it’s in place. Typically, both parties must agree on a termination and a court of law must determine that conditions on or surrounding the land make it impossible or impractical to continue to use the land for agricultural purposes. Attempts to terminate without following the stated procedures can result in penalties for the current landowner.  If there was a payment for the agricultural easement, a deed of easement will likely require the landowner to reimburse the paying party for the proportionate share of the fair market value of the land with the easement removed and will also require the party receiving the reimbursement to use the funds only for similar conservation purposes.  

Eminent domain can be an issue.  As one Ohio farm family has learned, an agricultural easement might not protect the farmland from an eminent domain proceeding.  In Columbia Gas v. Bailey, 2023-Ohio-1245, the Bailey family was forced to litigate an attempt by Columbia Gas to use eminent domain for the construction of a gas pipeline across their farmland.  Their predecessor had placed an agricultural easement on the farmland in 2003, and the family argued the easement prevented the taking of land for the pipeline under the doctrine of “prior public use.”  That doctrine prohibits an eminent domain action that would destroy a prior public use.  The court agreed that the agricultural easement did create a prior public use on the land, and the court shifted the burden to Columbia Gas to prove that the pipeline would not destroy the established prior public use.  Rather than doing so, Columbia Gas withdrew its eminent domain proceeding and moved the location of the pipeline.  The court's decision to recognize an agricultural easement as a prior public use might provide some protection from eminent domain for future owners of agricultural easement land but, like the Baileys, landowners may have to fight a long, expensive battle to prove that an eminent domain action would destroy an established prior public use.

Lenders and other interests must be on board.  A landowner must deal with any existing mortgages, liens, leases, or easements on the farmland before entering into an agricultural easement.  The State of Ohio’s agricultural easement, for example, requires a lender to subordinate a mortgage to the rights of the easement holder.  Renegotiation of the mortgage might be necessary, and the lender might require a paydown of the outstanding mortgage if the property’s value could reduce below that amount.  Without subordination and other approvals, a landowner will not be able to enter into an agricultural easement. 

Local governments must be on board.  Ohio’s program for purchasing agricultural easements requires a landowner to submit a resolution of support from the township and county where the land is located.  This means the local governments must agree that committing the land to agriculture is consistent with local land use plans.  An early conversation with local officials is necessary to ensuring consistency with the community’s future plans.

There will be monitoring.  An easement holder has the responsibility of ensuring there is not a violation of the easement or conversion of the land to non-agricultural uses.  This means there will be a baseline or “present condition” report of the easement property upon easement creation and monitoring of the property “in perpetuity.”  An annual visit to the property and completion of an annual monitoring report by the easement holder is common. 

It's a lengthy process.  Agricultural easements don’t pop up overnight.  Especially when applying for funding from competitive programs like Ohio’s Local Agricultural Easement Purchase Program or the NRCS Agricultural Land Easements Program, it can be a year or more before an agricultural easement is in place. 

Planning and integration with plans is necessary.  An agricultural easement is one piece of what can be a complex plan addressing a landowner’s expansion, retirement, estate, and transition needs.  A landowner would be wise to work with a team of professionals—financial planner, tax professional, attorney—to ensure that an agricultural easement integrates with all other parts of the plan.

Still interested?  Ohio landowners interested in learning more about agricultural easements may want to consider these steps:

  • Review the resources on the Ohio Department of Agriculture’s Office of Farmland Preservation.
  • Talk with other landowners who have entered into easements.  Refer to the Coalition of Ohio Land Trusts landowner resources and landowner stories.
  • Visit American Farmland Trust’s Farmland Information Center.
  • Talk with a “local sponsor” or land trust in your area.  The Office of Farmland Preservation provides a list of local sponsors for the Clean Ohio Agricultural Easement Purchase Program on its website.
  • Talk with your attorney, financial planner, and accountant about the implications of entering into an agricultural easement.
By: Robert Moore, Tuesday, October 10th, 2023

Legal Groundwork

In the previous post “Artificial Intelligence – What Is it and How to Use It” (May 31, 2023), I briefly discussed AI, how it works and some of its potential uses.  There is no doubt that AI will have profound effects on each of us and our society in general.  In this post, I am going to examine how AI works for a specific task related to agricultural law and measure its performance.

Surveys by Ohio State University indicate around 50% of farmland in Ohio is leased.  Therefore, farm leases are an important legal document for many Ohio farmers.  While some farm leases are still only verbal, many tenants and landowners recognize the benefits of a written lease and have at least a basic written lease in place.  Some leases are written by the tenant or landlord while other leases are written by attorneys.  The issue addressed in this article is: is AI ready to draft your farm lease?

The Process

To address the above question, ChatGPT and Google Bard, two of the more prominent AI interfaces, were each tasked with the following: “draft a cash farm lease”.  This command was broad and vague but would likely reflect what a tenant or landowner might request.  This exercise was performed on May 30, 2023 and each AI tool provided a cash farm lease.  The exercise was again performed on October 4, 2023 to assess if AI’s capabilities changed over time.

To measure the effectiveness of AI, the drafted leases were compared to the recommended lease terms provided in OSU Extension’s bulletin “What’s In your Farm Lease?  A Checklist of Farm Lease Provisions”.  This bulletin was written by Peggy Hall and provides 26 key terms that should be included in most farm leases.  Each draft lease was scored based on the number of terms that were included.

The Results

The following is the score for each draft, with the score reflecting the number of recommended terms from the lease bulletin that were included in the lease drafts:

            ChatGPT, May 2023                   8

            Google Bard, May 2023             10

            Chat GPT, October 2023             9

            Google Bard, October 2023        7

As the scores show, neither ChatGPT nor Google Bard included even one-half of the recommended terms and the best was 10 out of 26 or 38%. Two important items of note.  First, no drafts included terms to prevent the tenant from assigning the lease to someone else – an extremely important provision to include in farm leases. Second, no drafts addressed landowner or tenant signatures needing notarized.1

I would describe these drafts as “bare minimum” leases.  They are probably better than having no lease at all, but they could be much better and do not include several key terms.  Also, there was no significant improvement of performance over time.  In fact, the Google Bard score was lower in the later draft.  Asking ChatGPT or Google Bard to “draft a farm cash lease” is not going to provide a satisfactory lease.

Providing Input to AI to Improve Output

As I discussed in my prior AI post, one of the benefits of AI is the ability to chat with it.  That is, you can provide feedback to the AI to assist it in providing a better outcome.  So, that’s what I did.  After reviewing the first two rounds of lease drafts, I asked ChatGPT and Google Bard to draft a third cash farm lease and to specifically include the 26 recommended terms from the lease bulletin.  The resulting leases were better and scored as follows:

            ChatGPT           16

            Google Bard      20

As you can see, the scores increased significantly.  So, the feedback provided to AI was integrated into the resulting drafts and made the leases better.  This is one of the major advancements of AI. It allows someone like me that has little computer proficiency to provide untrained input that causes a significantly better result. 

While the scores did increase, there were still some major issues with the drafts.  I was probably generous in the scoring and gave credit if an issue was addressed, even if somewhat incomplete.  For example, in its first two drafts, ChatGPT did not include a term addressing who receives FSA payments, the tenant or landowner.  ChatGPT did address this issue after being prompted but stated that the landowner would receive all FSA payments.  According to FSA rules, the tenant must receive at least some of the program payments and it is customary for the tenant to receive all FSA payments.  So, while ChatGPT included a term about FSA payments, the included term was not completely accurate or correct.

Google Bard also had similar issues.  In its first two drafts, it did not address what happens in the event of eminent domain takes a portion of the leased property.  A typical lease term would say that the tenant is compensated for any crop damage caused by eminent domain and the landowner would keep the acquisition proceeds.  Google Bard included a provision about eminent domain but stated the tenant would receive all eminent domain proceeds.  Allowing the tenant to keep eminent domain proceeds would be very unusual and not something a landowner should agree to.

I would assess these leases as “better but still not good”.  These drafts did include more of the recommended terms but included many of them in an insufficient or incomplete manner.  The third round of leases did show that AI can learn and improve with feedback but also that it has a long way to go.  The craft and nuance of drafting legal documents still seems to belong to the domain of people.

Conclusion

There are some well-known people, such as Elon Musk, who claim that we should have serious concerns about AI eventually taking over the world.  Their concerns may be valid, but as of now I don’t believe AI is going to take over farm lease drafting anytime soon.  An experienced attorney can do a much better job of drafting a farm lease than today’s AI.  For a tenant or landowner who are unwilling to hire an attorney or may not have the resources to pay an attorney, a farm lease drafted by AI may be better than nothing but that’s about it.  The best source of legal services remains to be attorneys and likely will be for the foreseeable future.  AI is not ready to replace your attorney – yet.


1Leases for more than three years must be notarized.

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