Estate and Succession Planning
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.
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.
I had the good fortune recently to attend the International Farm Management Congress in Copenhagen, Denmark, along with the pre-conference tour of farms through Norway and Sweden. It was not only a beautiful trip, but an opportunity to view farming practices and legal issues in other parts of the world. Some practices and issues were surprisingly familiar while others were quite different. As I visited farms and interacted with farm operators and agricultural business owners, I developed a list of observations about the similarities and differences. Here are a few of those observations.
- Farmland should stay in the family. Very old “allodial” and “concession” laws in Norway and Sweden prevent agricultural property from being sold outside the family or divided into smaller parcels and grant the eldest heir the right to inherit the property. It works. We visited several farms that had been in the same family for 12 to 14 generations.
- Environmental compliance and sustainability goals present both challenges and opportunities. Norway, Denmark, and Sweden have aggressive goals to reduce carbon emissions. While some businesses noted the challenges of complying with air and water regulations, they were committed to change because consumers want “more sustainable” products and experiences.
- Agritourism includes sleepovers. We visited several farms that capitalize on people’s desires to be on a farm, but they also include opportunities to stay over in a hotel or “caravan park” (campground) on the farm, and several also offer spa experiences. The “farm stay” concept that is so common in Scandinavia is just now beginning to spread across the U.S.
- Animal welfare laws concern livestock operators. As we see here in the U.S., new regulations on livestock housing have affected the bottom line of operators forced to make housing changes. Several operators noted the financial challenges of complying with new requirements, with some choosing not to continue under the new laws.
- Cooperative models are thriving. We visited a cooperative for fruit and vegetable producers in a mountain region of Norway, a sheep farm that developed a slaughterhouse to manage processing for other local livestock operators, and a start-up processing facility for pea and legume growers in Sweden, all using cooperative business structures similar to ours here in the U.S.
While some of the issues vary in Scandinavia, the attachment to farming is not all that different. One of my favorite quotes from the trip illustrates the similarity. The father in a father-son operation stated to us: “We are proudly farming, growing wheat and potatoes and having chickens.” Proudly farming—a practice shared by U.S. and Scandinavia farmers alike, in the midst of varying legal issues and opportunities.
Learn more about the International Farm Management Association at https://www.ifma.network/. The next IFMA Congress takes place in 2024 in Saskatchewan, Canada.
By Robert Moore, Attorney and Research Specialist, OSU Agricultural and Resource Law Program
The costs for assisted living and nursing home care have steadily been increasing. Many people find themselves in the situation where their income will not cover the costs of long-term care. Long-term care costs have become a significant risk to Ohio farms and the ability to continue a viable farming operation for future generations.
The following are the most recent long-term care costs from a Genworth survey:
Type of Care Annual Cost
Ohio Semi - Private Room $85,776
Ohio - Private Room $98,556
National – Semi-Private Room $93,075
National – Private Room $105,850
Ohio - Assisted Living $52,500
National - Assisted Living $54,000
Ohio costs are less than national costs but are still significant. Care facilities in small towns and rural areas tend to cost less than facilities in larger cities like Cleveland, Columbus and Cincinnati. Costs are expected to continue to increase. By 2030, Genworth predicts that national average cost for a private room in a nursing home will be around $142,000/year.
Farmers that do not have adequate income to pay for long-term care costs will be required to dip into savings to make up the deficit. If savings are extinguished, farm assets may need to be sold to pay for the care. The sale of these farm assets is what can jeopardize the future viability of the farming operation.
There are no easy solutions regarding long-term care costs. Options include gifting assets away, buying long-term care insurance or self-insuring. Medicaid can also play a role in long-term care costs. In future posts we will discuss strategies to minimize the risk of long-term care costs to farming operations.
Did you know that elephants can’t jump? In fact, it’s impossible for elephants to jump because, unlike most mammals, the bones in an elephant’s leg are all pointed downwards, which eliminates the “spring” required to push off the ground.
Unlike elephants, we have jumped all over the place to bring you this week’s Ag Law Harvest. Below you will find agricultural and resource law issues that include, among other things, conspiracy, preemption, succession planning support, ag spending and disaster relief, and Ohio’s broadband and salmon expansion.
Poultry price fixing conspiracy. According to a press release from the Department of Justice (“DOJ”) a federal grand jury has decided to indict Koch Foods and four former executives of Pilgrim’s Pride for allegedly engaging in a nationwide conspiracy to fix prices and rig bids for broiler chicken products. These indictments combine to make a total of 14 individuals charged in the conspiracy that allegedly started in 2012 and lasted until 2019. The indictments allege that the defendants and co-conspirators conspired to suppress and eliminate competition for sales of broiler chicken products sold to grocers and restaurants. The DOJ reiterated its commitment to prosecuting price fixing and antitrust violations. These indictments come on the heels of President Biden’s Executive Order seeking to promote competition within the American Economy, which focused heavily on the agriculture industry. In addition to Koch Foods, additional companies have been indicted in the conspiracy. So far, Claxton Poultry and Pilgrim’s Pride have both been indicted in the conspiracy with Pilgrim’s Pride agreeing to pay a $107 million fine. Koch Foods denies any involvement in the price fixing scheme.
FIFRA giving Monsanto a little relief. About a week before the trial of another lawsuit against the Monsanto Company (“Monsanto”) and its Roundup products, a California judge dismissed some of the claims filed by the plaintiff. According to the judge, some of the claims asserted by the plaintiff were preempted by the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”) and therefore could not be pursued. The plaintiff claimed that Monsanto had a state-law duty to warn that Roundup causes cancer. The judge noted that under FIFRA, a state cannot impose or continue to impose any requirement that is “in addition to or different from” those required by FIFRA. At the time, federal regulations did not require Monsanto to place a cancer warning on its Roundup products. The judge reasoned that since federal law is supreme (i.e. preempts state law) California cannot impose a state-law duty on Monsanto to warn that Roundup causes cancer. The judge, therefore, found that the plaintiff cannot pursue her claims against Monsanto for failure to warn under California law. This ruling is in contrast to a recent 9th Circuit Court of Appeals decision which concluded that the failure to warn claims brought by the plaintiff in that suit were not preempted by FIFRA. Plaintiff has time to appeal the judge’s decision, even beyond the start of the trial and could rely on the 9th Circuit’s opinion to help her argue that her claims should not have been dismissed.
Competitive loans now available for land ownership issues and succession planning. The USDA announced that it will be providing $67 million in competitive loans through the new Heirs’ Property Relending Program (“HPRP”). The HPRP seeks to help agricultural producers and landowners resolve land ownership and succession issues. Lenders can apply for loans up to $5 million at 1% interest through the Farm Service Agency (“FSA”) once the two-month signup window opens in late August. Once the lenders are selected, heirs can apply to those lenders for assistance. Heirs may use the loans to resolve title issues by financing the purchase or consolidation of property interests and for costs associated with a succession plan. These costs can include buying out fractional interests of other heirs, closing costs, appraisals, title searches, surveys, preparing documents, other legal services. Lenders will only make loans to heirs who: (1) look to resolve ownership and succession of a farm owned by multiple owners; (2) are a family member or heir-at-law related by blood or marriage to the previous owner; and (3) agree to complete a succession plan. The USDA has stated that more information on how heirs can borrow from lenders under the HPRP will be available in the coming months. For more information on HPRP visit https://www.farmers.gov/heirs/relending.
House Ag Committee approves disaster relief bill. The House Agriculture Committee approved an $8.5 billion disaster relief bill to extend the Wildfire and Hurricane Indemnity Program (“WHIP”). The bill, known as the 2020 WHIP+ Reauthorization Act, provides relief for producers for 2020 and 2021 related to losses from the ongoing drought in the western half of the United States, the polar vortex that hit Texas earlier this year, wildfires that tainted California wine grapes with smoke, and power outages, like the one seen during the polar vortex in Texas, which caused dairy farmers to dump milk. The bill makes it easier for farmers to recover for losses related to drought, now only requiring a D2 (severe) designation for eight consecutive weeks as well as allowing disaster relief payments for losses related to power outages that result from a qualified disaster event. With the Committee’s approval the bill makes its way to the house floor for a debate/vote. Whether it’s a standalone bill or a bill that is incorporated into an appropriations bill or a year-end spending measure remains to be seen.
Senate Appropriations Committee approves ag spending bill. The Senate Appropriations Committee voted in favor of a fiscal year 2022 spending bill for the USDA and FDA that includes about $7 billion in disaster relief and $700 million for rural broadband expansion. The Committee approved $25.9 billion for the FY2022 ag spending bill, which is an increase of $2.46 billion from the current year. In addition to disaster relief funds and rural broadband, the bill increases research funding to the USDA, increass funding for conservation and climate smart agricultural practices, and increases funding for rural development including infrastructure such as water and sewer systems and an increase in funding to transition rural America to renewable energy. The ag spending bill is now set for debate and vote by the full Senate.
Ohio to be the second site for AquaBounty’s genetically engineered salmon. Land-based aquaculture company AquaBounty has selected Pioneer, Ohio as the location for its large-scale farm for AquaBounty’s genetically engineered salmon. The new farm will be AquaBounty’s first large-scale commercial facility and expects to bring over 100 jobs to northwestern Ohio. According to AquaBounty’s press release, the plan for the new farm is still contingent on approval of state and local economic incentives. Ohio is still finalizing a package of economic incentives for the new location and AquaBounty hopes to begin construction on the new facility by the end of the year. AquaBounty has modified a single part of the salmon’s DNA that causes them to grow faster in early development. It raises its fish in what it calls “Recirculating Aquaculture Systems,” which are indoor facilities that are designed to prevent disease and protect wild fish populations. According to AquaBounty, its production methods offer a reduced carbon footprint and no risk of pollution of marine ecosystems as compared to traditional salmon farming. AquaBounty anticipates commercial production to begin in 2023.
DeWine orders adoption of emergency rules to speed up the deployment of broadband in Ohio. Governor Mike DeWine signed an executive order which will help speed up the launch of the Ohio Residential Broadband Expansion Grant Program (the “Program”) which was recently signed into law by Governor DeWine. The Program is Ohio’s first-ever residential broadband expansion program which grants the Broadband Program Expansion Authority the power to review and award Program grant money for eligible projects. The Program requires a weighted scoring system to evaluate and select applications for Program grants. Applications must be prioritized for unserved areas and areas located within distressed areas as defined under the Urban and Rural Initiative Grant Program. The Program hopes to provide high-speed internet to Ohio residences that do not currently have access to such services. With DeWine’s executive order, the Program can start immediately rather than waiting until the lengthy administrative rule making process is complete. Normally, rules by a state agency must go through a long, drawn out process to ensure the public has had its input on any proposed rules and those affected the most can challenge or argue to amend the rules. However, the Governor does have the ability to suspend the normal rule making process when an emergency exists requiring the immediate adoption of rules. According to Governor DeWine’s executive order, the COVID-19 pandemic, the increase in telework, remote learning, and telehealth services have created an emergency that allows DeWine to suspend the normal rule making process to allow the Program to be enacted without delay. Although emergency rules are in place, they are only valid for 120 days. New, permanent rules must be enacted through the normal rule making procedure.