Business and Financial
Farmland can be a family's most important asset, recognized for both its heritage and financial value. Here's some proof: over 1,900 "Century Farms" in Ohio have been in the same family for over 100 years. And 130 of those farms have been in the same family for over two centuries -- testaments to the importance of farmland to Ohio families.
But there are threats that can cause farmland to leave a family despite its value to family members. Long-term care costs, divorce, debt, co- ownership rights, poor estate planning -- these are situations that can put family farmland at risk. The good news is that legal strategies can counter these threats.
In our new publication, Keeping Farmland in the Family, we offer five legal tools that can help keep farmland in a family:
- Agricultural or conservation easement
- Right of First Refusal
- Long-term lease
- Limited Liability Company
- Trust
These legal tools offer a range of protection for family farmland, allowing a family to use a highly restrictive strategy that protects land for many generations or a less restrictive approach that secures land only for a generation or two. Examples provided throughout the publication can help farm families see how different scenarios play out. The guide does not intend to substitute for individual legal advice, but offers a family a starting point for discussion and decisionmaking with an agricultural attorney.
Read Keeping Farmland in the Family here. We were able to produce this publication with financial assistance from the National Agricultural Law Center and the USDA's National Agricultural Library.
Tags: keeping farmland, protecting farmland, Estate Planning, transition planning, trusts, LLCs, leases, agricultural easements, Right of First Refusal
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According to the last Census of Agriculture, about 87% of farms in Ohio are sole proprietorships. This means that the vast majority of farms have no formal business structure. However, we often hear of the need to have a business entity for liability protection, taxes or for a variety of other reasons. So, how do you know if you need a business entity.
Like most legal answers, it depends. LLCs and corporations can help with liability protection. These entities prevent the owners from having personal liability for the acts of the entity or anyone acting on behalf of the entity. For example, if an employee of an LLC causes an accident driving equipment on a roadway, the owners of the LLC will not usually be personally liable. The assets in the LLC are at risk but not the other assets outside of the LLC.
While LLCs do provide liability protection, they are no substitute for liability insurance. The most important liability risk management strategy should always be a good liability insurance policy. LLCs and corporations are good backup plans if the insurance policy does not cover the liability in some way. Therefore, business entities can help with liability protection, but they are not a necessity like insurance. Generally, the more owners and employees a business has, the more liability protection benefit an LLC or corporation will provide.
Business entities are often more valuable as a succession planning tool than they are for liability protection. For example, land that is or will be owned by multiple family members is subject to the risks of partition. Partition is the process where a co-owner of land forces the land to be sold as a way of “cashing out” their ownership in the land. Land held in business entities is not subject to partition. Those who own land with other people should strongly consider an LLC or other entity to protect against partition.
Business entities can be tax management tools as well. For example, a sole proprietorship can only file taxes as a sole proprietor on a Schedule F or Schedule C. That same sole proprietorship can convert to an S-Corp which often reduces self-employment tax liability. Farm and business owners who seek the best fringe benefits such as health insurance and retirement benefits may want to be taxed as a C-Corp. As these examples illustrate, business entities can provide tax management options that sole proprietorships do not.
Business entities do have several disadvantages. One is the cost of establishing the entity. The cost depends on the number of owners, the assets that will be put into the LLC and the terms of the governing document. Establishing an entity can cost several thousand dollars or more in legal fees. Another disadvantage is managing the entity. Each entity will need its own bank account, accounting, and tax return. If an entity is not properly managed, it may not provide the expected liability protection or tax structure.
Liability management, succession planning and tax management are just a few of the many factors that should be considered when deciding if a business entity is worthwhile. The best course of action is to meet with your attorney and accountant to assess the benefit that a business entity may have for your farm or business. If the benefits outweigh the disadvantages, then you should strongly consider establishing a business entity. If benefits do not outweigh the disadvantages, you may not need an entity and that is OK. Many successful businesses are sole proprietorships and yours can be as well.
Tags: Entities, Estate and Succession Planning
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Business entity discounts can be a valuable tool in farm succession planning. This strategy provides a method of reducing the values of assets that will be in an estate without the need for gifting. Discounting can be used with any kind of entity; the key is to draft the entity’s controlling agreement to maximize the discount.
Discounting is based on two important factors: lack of marketability and lack of control. Lack of marketability reflects the disinterest that an outside buyer would have in buying into a closely held entity. Lack of control reflects the inability of an owner to singularly control the entity. These two factors overlap somewhat but they essentially measure the discount that would be needed to make an arms-length buyer interested in buying an ownership interest in the entity.
The amount of discount is scrutinized by the IRS. Owners of entitles have abused the discounting strategy in the past as a scheme to transfer ownership without incurring gift taxes or estate taxes. A typical discount for an ownership interest that is fully subject to lack of marketability and lack of control may be around 35%. Discounts in excess of 35% may be challenged by the IRS as excessive. The discount is usually determined by an accountant or other financial professional that has expertise in determining business entity discounts.
Discounting can best be explained using examples. Let’s say Mom and Dad own 400 acres of farmland valued at $3 million. If Mom and Dad were to die with the land titled in their names, the land would be valued at $3 million in their estates. The land is valued at its full value because either Mom or Dad can cause the land to be sold at any time through partition and they would presumably receive full, fair market value.
Now, let’s say Mom and Dad transfer the land into an LLC. The LLC’s operating agreement includes the following provisions:
- Land may not be sold without majority consent of ownership
- Money cannot be distributed out of the LLC without majority consent
- The LLC cannot be dissolved without majority consent
- Ownership may only be transferred to the descendants of Mom and Dad
Additionally, Mom and Dad gift a 0.5% ownership interest to each Son and Daughter. After the gift, Mom and Dad are each 49.5% owners of the LLC. Now, neither Mom nor Dad can singularly control anything that happens with the LLC. Due to the lack of marketability and lack of control created by the terms of the LLC operating agreement and the minority ownership (49.5%), Mom and Dad can expect to receive around a 35% discount on their ownership.
Using discounting, Mom and Dad have reduced the value of their estate by over $1 million by setting up an LLC and transferring their land to the LLC. At a 40% estate tax rate, Mom and Dad have potentially saved Son and Daughter over $400,000 in estate taxes. Entity discounts can same many thousands, if not millions, of dollars in estate taxes for some farm families.
The primary downside of using a business entity for discounts is the cost of establishing and maintaining the LLC. An LLC will need to be established, an operating agreement drafted and deeds executed to transfer the land to the LLC. Perhaps the initial startup and deed expense will be around $5,000. The LLC will need to maintain a bank account to collect rent and pay expenses such as real estate taxes. Additionally, the LLC will be required to file a tax return each year. While there are startup and maintenance costs for the LLC, the savings in estate taxes usually makes establishing business entity discounts and easy decision.
It should be noted that some presidential administrations have sought to eliminate the entity discounts for family-held businesses. So, the business entity discount can be abolished with a stroke of a pen at any time. However, as long as discounts are available, they can be a very valuable tool in farm transition planning.
For those farmers and landowners who may be concerned about estate taxes, a business entity may be a relatively simple but effective tool to reduce the value of the estate. An attorney should be included in the process of establishing the LLC to be sure that the necessary provisions are included in the operating agreement to maximize the discount. Also, a tax advisor should be consulted to ensure a thorough understanding of the tax ramifications of establishing an LLC.
Tags: entity discounts
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OSU Income Tax Schools 2022
Two-Day Tax Schools for Tax Practitioners &
Agricultural & Natural Resources Income Tax Issues Webinar
Barry Ward & Jeff Lewis, OSU Income Tax Schools
Tax provisions related to new legislation as well as continued discussion related to COVID-related legislation for both individuals and businesses are among the topics to be discussed during the upcoming OSU Income Tax Schools offered throughout Ohio in October, November, and December.
The annual series is designed to help tax preparers learn about federal tax law changes and updates for this year as well as learn more about issues they may encounter when filing individual and small business 2022 tax returns.
OSU Income Tax Schools are intermediate-level courses that focus on interpreting tax regulations and changes in tax law to help tax preparers, accountants, financial planners, and attorneys advise their clients. The schools offer continuing education credit for certified public accountants, enrolled agents, attorneys, annual filing season preparers and certified financial planners.
Attendees also receive a class workbook that alone is an extremely valuable reference as it offers over 600 pages of material including helpful tables and examples that will be valuable to practitioners. Summaries of the chapters in this year’s workbook can be viewed at this site:
https://farmoffice.osu.edu/tax/2022-tax-school-chapters
A sample chapter from a past workbook can be found at:
https://taxworkbook.com/about-the-tax-workbook/
This year, OSU Income Tax Schools will offer both in-person schools and an online virtual school presented over the course of four afternoons.
In-person schools:
October 27-28, Ole Zim’s Wagon Shed, Gibsonburg/Fremont
October 31-November 1, Presidential Banquet Center, Kettering/Dayton
November 3-4, Old Barn Restaurant & Grill, Lima
November 8-9, Muskingum County Conference and Welcome Center, Zanesville
November 21-22, Ashland University, John C. Meyers Convocation Center, Ashland
November 29-30, Nationwide & Ohio Farm Bureau 4-H Center, Columbus
December 5-6, Hartville Kitchen, Hartville
Virtual On-Line School presented via Zoom:
November 7, 10, 14 & 18, 12:30 – 4:45 p.m.
Register two weeks prior to the school date for the two-day tax school early-bird registration fee of $400. This includes all materials, lunches, and refreshments. The deadline to enroll is 10 business days prior to the date of each school. After the early-bird deadline, the fee increases to $450.
Additionally, the 2022 Checkpoint Federal Tax Handbook is available to purchase by participants for a discounted fee of $60 each. Registration information and the online registration portal can be found online at:
http://go.osu.edu/2022tax
In addition to the tax schools, the program offers a separate, two-hour ethics webinar that will broadcast Thursday, Dec. 8 at 1 p.m. The webinar is $25 for school attendees and $50 for non-attendees and is approved by the IRS and the Ohio Accountancy Board for continuing education credit.
A webinar on Ag Tax Issues will be held Tuesday, Dec. 13 from 8:45 a.m. to 3:20 p.m.
If you are a tax practitioner that represents farmers or rural landowners or are a farmer or farmland owner that prepares your own taxes, this five-hour webinar is for you. It will focus on key topics and new legislation related specifically to those income tax returns.
Registration, which includes the Ag Tax Issues workbook, is $160 if registered at least two weeks prior to the webinar. After November 29, registration is $210. Register by mail or on-line at https://go.osu.edu/agissues2022.
Participants may contact Ward at 614-688-3959, ward.8@osu.edu or Jeff Lewis at 614-247-1720, lewis.1459@osu.edu for more information.
Tags: Ag Tax, Tax School, Business Tax, Individual Tax, Income, Return, IRS, Internal Revenue Service
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High crop prices and COVID era legislative ad-hoc government payments coupled with lower interest rates (among other factors) over the last 2 and half years have given strength to farmland markets. Higher input costs over the last year and half together with rising interest rates have offset some of this strength but farmland values continue to increase. Many of these same factors have given strength to the farmland rental markets which have also seen increases this last year and will likely see additional increases in 2022.
According to the Western Ohio Cropland Values and Cash Rents Survey, cropland values in western Ohio are expected to increase in 2022 by 8.0 to 11.3 percent depending on the region and land class. This is on top of increases from 2020 to 2021 of 7.2 to 26.6 percent depending on region and productivity class.
Cash rents are expected to increase from 5.8 to 6.8 percent depending on the region and land class. This is on top of rental increases of 1.5 to 7.7 percent from 2020 to 2021.
Ohio Cropland Values and Cash Rent
Ohio cropland varies significantly in its production capabilities and, consequently, cropland values and cash rents vary widely throughout the state. Generally, western Ohio cropland values and cash rents differ from much of southern and eastern Ohio cropland values and cash rents. The primary factors affecting these values and rents are land productivity and potential crop return, and the variability of those crop returns. Soils, fertility and drainage/irrigation capabilities are primary factors that most influence land productivity, crop return and variability of those crop returns.
Other factors impacting land values and cash rents may include field size and shape, field accessibility, market access, local market prices, field perimeter characteristics and potential for wildlife damage, buildings and grain storage, previous tillage system and crops, tolerant/resistant weed populations, USDA Program Yields, population density, and competition for the cropland in a region. Factors specific to cash rental rates may include services provided by the operator and specific conditions of the lease. This fact sheet summarizes data collected for western Ohio cropland values and cash rents.
Study Results
The Western Ohio Cropland Values and Cash Rents study was conducted from January through April in 2022. The opinion-based study surveyed professionals with a knowledge of Ohio’s cropland values and rental rates. Professionals surveyed were rural appraisers, agricultural lenders, professional farm managers, ag business professionals, OSU Extension educators, farmers, landowners, and Farm Service Agency personnel.
Respondents were asked to group their estimates based on three land quality classes: average, top, and poor. Within each land-quality class, respondents were asked to estimate average corn and soybean yields for a five-year period based on typical farming practices. Survey respondents were also asked to estimate current bare cropland values and cash rents negotiated in the current or recent year for each land-quality class. Survey results are summarized for western Ohio with regional summaries (subsets of western Ohio) for northwest Ohio and southwest Ohio.
The complete survey summary can be accessed and downloaded here on one of our Farm Office pages:
https://farmoffice.osu.edu/farm-management-tools/farm-management-publications/cash-rents
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
The idea to use income tax incentives to help Ohio’s beginning farmers gain access to agricultural assets floated around for several years in the Ohio General Assembly. The idea became a reality when the Beginning Farmer Bill sponsored by Rep. Susan Manchester (R-Waynesfield) and Rep. Mary Lightbody (D-Westerville) passed the legislature, was signed by Governor DeWine and became effective on July 18, 2022. The law is now in the hands of the Ohio Department of Agriculture (ODA), charged with implementing its provisions.
The new law sets initial eligibility criteria for certifying “beginning farmers,” directs ODA to establish the certification program, and authorizes two types of income tax credits for certified beginning farmers and those who sell or lease assets to certified beginning farmers. According to ODA, the income tax credits will be available for 2023, once the certification program is up and running. The law sunsets the tax credits on January 1, 2028 and also limits the total amount of tax credits that can be awarded to $10 million.
Here’s a summary of what to expect from the new law.
Certification of beginning farmers. The ODA will establish a process for designating a farmer who meets the eligibility criteria to be a “certified beginning farmer.” The law sets initial criteria for beginning farmers designation but also allows ODA to create additional requirements. ODA may seek participation from Ohio State and Central State in the certification of beginning farmers. The initial certification conditions are:
- Resident of Ohio.
- Seeking entry to or has entered farming within the last 10 years.
- Farms or intends to farm on land in Ohio.
- Is not a partner, member, shareholder, or trustee of the assets the individual is seeking to purchase or rent.
- Has a total net worth of less than $800,000 in 2021, including spouse and dependent assets, as adjusted for inflation each year.
- Provides majority of daily physical labor and management of the farm.
- Has adequate farming experience or knowledge in the type of farming for which seeking assistance.
- Submits projected earnings statements and demonstrates profit potential.
- Demonstrates farming will be a significant source of income for the individual.
- Participates in a financial management program approved by ODA.
Financial management programs for beginning farmers. ODA must approve financial management programs that meet the certification requirement, in consultation with Ohio State and Central State. The list of approved programs will be available on ODA’s website.
Income tax credits for certified beginning farmers. An individual who attains certification as a beginning farmer may apply for a state income tax credit equal to the cost incurred during the calendar year for participating in an ODA approved financial management program or a substantially equivalent financial management program approved by the USDA. The tax credit is nonrefundable. If the tax credit exceeds the beginning farmer’s tax liability in the year granted, the excess can carry forward for not more than three succeeding tax years.
Income tax credits for owners who sell or rent assets to certified beginning farmers. An owner who sells or rents “agricultural assets” to a certified beginning farmer during the calendar year or in either of the two preceding calendar years may apply for a state income tax credit. The credit will be equal to 3.99% of the sale price or the gross rental income received during the calendar year for either a cash or share rental agreement. “Agricultural assets” includes agricultural land (at least 10 acres and in agricultural production or earning $2500 in average yearly gross income from agricultural production if under 10 acres), livestock, facilities, buildings, and machinery used for agricultural production in Ohio. The owner cannot be an equipment dealer, however, nor can the certified beginning farmer receiving the assets be a partner, member, shareholder, or trustee of the owner of the assets. Rented assets must be rented at prevailing community rates, as determined by ODA in consultation with the Ohio tax commissioner. The tax credit is nonrefundable but may be carried forward for seven succeeding tax years if it exceeds the owner’s tax liability.
Time to plan. As we await ODA’s rules and procedures for the new tax credits, beginning and existing farmers can use this time for planning. Review the new law with your attorney and accountant to determine how the income tax credits could affect you. If you are a beginning farmer seeking agricultural assets, spend time trying to connect with an existing farmer who is ready to sell or rent agricultural assets. Although the 3.99% credit for those transfers may not sound significant, run the numbers and see how they could play out. The hope of the new law is that those numbers will be enough to help a beginning farmer have greater access to those important assets that are critical to farming in Ohio.
Information on House Bill 95, the Beginning Farmer bill, is available at this link.
Tags: beginning farmer, House Bill 95, HB 96, income tax credits
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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.
Tags: probate, Estate Planning
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Is it time to start thinking about your farmland lease for next year? We think so! There are new legal issues and updated economic information to consider for the upcoming crop year. That’s why we’ve scheduled our next Ohio Farmland Leasing Update for Thursday, August 11 at 8 a.m. Join the Farm Office team of Barry Ward, Robert Moore and Peggy Hall for an early morning webinar discussion of the latest economic and legal farmland leasing information for Ohio.
Here are the topics we’ll cover:
- Ohio’s new statutory termination law for verbal farmland leases
- Using a Memorandum of Lease and other lease practice tips
- Economic outlook for Ohio row crops
- New Ohio cropland values and cash rents survey results
- Rental market outlook
There’s no cost to attend the Zoom webinar, but registration is necessary. Visit https://go.osu.edu/farmlandleasingupdate for registration. And if you’re already thinking about your next farmland lease, also be sure to use our farmland leasing resources on https://farmoffice.osu.edu.
Tags: farmland lease, leasing, rental rates, rental market, farm leases, statutory termination
Comments: 0
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.
Tags: Estate and Succession Planning, business entities
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