farm transition planning
Join experts David Marrison and Robert Moore at Ohio Maple Days for a hands-on workshop on farm transition planning. This engaging session is designed to guide farm families in making thoughtful plans for the future of their farm business. Discover how to have essential conversations about succession and explore practical strategies and tools for transferring ownership, management, and assets to the next generation.
The workshop will take place on December 6, from 10:00 a.m. to 3:00 p.m., at the Ashland University Convocation Center. Visit woodlandstewards.osu.edu for additional information. Can't attend? More farm transition workshops are scheduled in the coming months—find dates and locations under the Farm Transition section at farmoffice.osu.edu.
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We're building a forum for professionals who meet a critical need: helping farm operations transition to the next generation. The second annual Cultivating Connections Conference is for attorneys, tax professionals, appraisers, financial planners, educators and others who work in farm transition planning. The conference is an opportunity to discuss laws, consider new tools, analyze planning strategies, work through a case study, and meet other professionals. If farm transition planning is what you do, we hope you'll join us for the conference in Cincinnati, Ohio on August 5 and 6. For those who want to attend but can't travel, we also provide a virtual attendance option.
Cultivating Connections Conference highlights include:
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Timely topics. Sessions include preparing for the 2025 tax sunset, utilizing business entity discounts, understanding rural appraisals, drafting prenuptial agreements, divorce impacts on transition planning, implementing the estate plan and estate tax return, communication strategies, organizing client information, and ethical issues in farm transition planning.
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Expert speakers. A faculty of experienced attorneys, accountants, academics, and appraisers will share their knowledge and insights.
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Problem solving. A real-life case study will provide an opportunity for collaborative in-depth analysis of practical farm transition planning techniques, estate planning considerations, and tax implications.
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Relationships. Attendees can meet new peers, share experiences, and build relationships with a network of other farm transition professionals.
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Continuing education credits. We offer Continuing Legal Education credits for Ohio and Iowa, IRS Continuing Education credits, and assistance applying for credits in other states.
The University of Cincinnati College of Law is the site of this year's conference, hosted by the Ohio State University Agricultural and Resource Law Program. Conference co-sponsors are Iowa State University's Center for Agricultural Law and Taxation and the National Agricultural Law Center. The three institutions partnered on the inaugural conference last year, and have since formed the Association of Farm Transition Planners to continue supporting the nation's farm transition planning professionals.
The Cultivating Connections Conference agenda, list of speakers and registration are at https://go.osu.edu/cultivatingconnections. The website also highlights attractions and events for conference attendees, such as the nearby Cincinnati Zoo, Kings Island, the Newport Aquarium, and the Great American Ballpark, where the Cincinnati Reds will host the San Francisco Giants on August 4. Cincinnati is a prime location for those who want to combine farm transition learning with a little summer fun. We hope to see you there!
Tags: farm transition planning, Cultivating Connections, Estate Planning, succession planning
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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.
One of the challenges with second marriages occurs when one or both spouses have children from a prior marriage. The spouses usually intend to provide adequate income to the surviving spouse upon the death of the first spouse to pass away. Also, the spouses will usually want some or all of their assets to ultimately go to their children, not their spouse’s children. So, the issue becomes, how to establish a plan to take care of the surviving spouse while ensuring the deceased spouse’s assets go to their own children?
Consider the following example, a typical second-marriage, farm transition scenario:
Mark and Mindy each have two children from previous marriages. Mark has farmed his entire adult life and built a large farming operation prior to marrying Mindy. Mindy has two children and is not involved in the farming operation. Mark’s two children plan to take over the farming operation. If Mark dies before Mindy, he wants to make sure Mindy has adequate income for the rest of her life. However, he wants his assets to be inherited by his children and not Mindy’s children.
Let’s first look at what poor planning might look like. If Mark and Mindy do not have an estate plan or a simple estate plan where everything goes to the surviving spouse then to the children, Mindy’s children could end up with some or all of Mark’s assets. In this scenario, if Mark dies first, all of his assets will go to Mindy. At that point, Mindy will have total control of the assets and could sell them all or leave them all to her children. For second marriages, no plan or a simple plan is usually not adequate to meet the goals of a farm transition plan.
The better plan is to use a trust. A trust can hold the deceased spouse’s assets for the surviving spouse’s life, thus providing income. Then, at the surviving spouse’s death, the assets are distributed to the deceased spouse’s children. The surviving spouse never has ownership of the deceased spouse’s trust assets, so the assets are never in danger of ending up with the surviving spouse’s children.
Continuing the previous example, Mark establishes a trust with the following terms:
“Upon my death, my farm assets shall be held in trust for the life of Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. Upon the death of Mindy, my Trustee shall distribute the assets to my children.”
These trust provisions will meet Mark’s goals of providing for Mindy while having his children eventually inherit his assets.
Sometimes we may want some assets to go directly to the deceased spouse’s children at death and some held in trust. This is very common for farm plans. When children will be taking over the farming operation, we may not want to tie up the operating assets in trust but instead have those go directly to the farming children. To implement this plan, the trust may have provisions similar to the following:
“Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children. The remainder of my assets, including my farmland, shall be held in trust for Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average. Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”
These trust provisions allow the farming operation to be inherited directly by Mark’s children, allowing a seamless transfer of the farming operation. The farmland is held in trust and leased by the children. The rental income from the farmland is provided to Mindy for the remainder of her life.
A third variation provides some assets outright to the children, some assets outright to the surviving spouse and some assets held in trust. This type of plan might be used when the spouses wish for some assets to go directly to the surviving spouse, without being held in trust. This is often done with cash or other financial accounts to provide immediate and freely available money to the surviving spouse. Trust provisions reflecting this type of plan may be as follows:
“Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children. My Trustee shall distribute my First National Bank account and Acme Financial Account to Mindy, outright and free of trust. The remainder of my assets, including my farmland, shall be held in trust for Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average. Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”
These trust provisions provide cash to Mindy for which she has immediate access and control. The farm assets continue to go directly to the children so that they can continue the farming operation and the farmland is held in trust to provide income for Mindy.
In conclusion, a trust can be designed with a great deal of flexibility and creativity. The surviving spouse can be provided with adequate income while protecting the assets for the deceased spouse’s children. A simple transition plan or no plan at all can result in some or all the deceased spouse’s assets being inherited by the surviving spouse’s children. Trusts are often an important component of a farm transition plan for second marriage scenarios.
In Part 2, we will discuss prenuptial and postnuptial agreements.
Tags: second marriages, farm transition planning
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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.
Tags: second marriages, farm transition planning
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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:
- Assemble a team of advisors and develop a CRT strategy.
- Donor establishes a CRT. The trust document declares the income beneficiaries and the charitable beneficiaries.
- Donor determines the assets to be contributed to the CRT.
- Donor contributes assets into the CRT, typically grain, machinery and/or livestock.
- The CRT sells the assets but does not pay tax.
- 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.
- The annuity pays out to the Donor over a number of years. The Donor pays income tax on the annuity distributions.
- 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.
Tags: retirement, Estate Planning, farm transition planning, charitable remainder trust, trust, CRT
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We discussed long-term care (LTC) costs in our April 20 blog post and analyzed recent data to project that a 65-year-old Ohioan, on average, can expect about $100,000 in LTC costs, and double that for a married couple. In this post, we continue to examine LTC costs by addressing an important question for farmers: can the average farmer absorb this cost without jeopardizing the farm and farm assets?
First, we need to remember that any income received by the farmer could be spent on paying the LTC costs. Farm income, land rent, social security income, and income from investments can all pay for LTC costs. After income is used to pay for LTC care costs, non-farm assets, like savings, can be used to pay for the costs. It’s the portion of the LTC costs that income and savings cannot cover that causes farm assets to be at risk. For example, if the farmer has $40,000 in savings, using that savings to pay LTC leaves only $60,000 of farm assets at risk.
Let’s next turn to the risk to farm assets. While a farmer would never want to sell any farm asset to pay for LTC, their land is probably the last asset they would want sold. Most farmers would sell grain, crops, livestock, and machinery before they would sell land. So, if income and savings cannot pay for LTC care costs, how at risk is the land? Data can also help us answer this question. According to the Economic Research Service – USDA (ERS), the total amount of non-real estate, farm assets owned by farmers in the US for 2020 were as follows:
Financial Assets $92,013,020,000
Inventory (crops, livestock, inputs) $62,866,872,000
Machinery $278,809,055,000
Total Non-Real Estate Farm Assets $533,688,897,000
The ERS further estimates that there were 2.02 million farmers in the US in 2020. So, on average, farmers owned $264,202 of non-real estate, farm assets. If income and savings are unable to pay for LTC costs, the average farmer would have an additional $264,202 of assets to sell before needing to sell real estate.
So, what does all this data tell us? On average, if farmers are forced to sell farm assets to pay for LTC, they will not need to sell their land. They may need to sell crops, livestock and/or machinery to help pay for the LTC costs but the land is probably safe. That is the good news.
The bad news is the above analysis is all based on averages. When dealing with large numbers, averages are very useful. We can say with some confidence that on average, a 65-year-old farmer in Ohio will spend around $100,000 on LTC. However, the numbers cannot tell us with any certainty what a specific farmer will spend on LTC. Farmer Smith in Delaware County, Ohio might never pay any LTC costs, might pay the average of $100,000 or they might be an outlier. An outlier is someone whose specific circumstances end up being significantly different than the average.
Being an outlier is what farmers are really concerned about regarding LTC. We all know someone, or have heard of someone, who was in a nursing home for 10 years. That’s close to $1 million in LTC costs. Few farmers have the income, savings and non-real estate assets to pay for $1 million of LTC.
So, what LTC planning for farmers really ends up being is protecting against the outlier scenario that puts the land at risk. Most 65-year-old farmers would probably sleep well at night if they knew they would only have $100,000 of LTC costs for the rest of their lives. That amount of LTC costs is probably not going to cause a farm liquidation. What keeps farmers up at night is the chance they will be the outlier and spend 10 years in an expensive nursing home.
The outlier scenario is important for farmers to understand as they develop their LTC strategy. For any risk management plan, the true nature of the risk must be understood and not just presumed. The fact is most farms can probably withstand the average LTC costs. It is also factual that most farms cannot withstand an outlier scenario of being in a nursing home for many years. This understanding is critical in developing a LTC plan. That is, the LTC plan should probably seek to mitigate the risk of being an outlier, not on being average.
Fortunately, there are strategies to help mitigate the risk of losing the farm to the outlier scenario, although each of the strategies have significant drawbacks. In future posts, we will discuss those strategies.
Tags: legal groundwork, long-term care, Estate Planning, farm transition planning
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By Robert Moore, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
Most farmers do a great job of managing their taxable income. They buy inputs or machinery to offset the current year’s income and wait until next year to sell the current crop. This strategy works well but it catches up to the retiring farmer. In the year of retirement, a farmer may find themselves with an entire year (or more) of crops or livestock to sell and no expenses to offset the income. Additionally, machinery and equipment that will no longer be needed for production will need to be sold. Selling all these assets upon retirement without offsetting expenses can result in tremendous tax liability.
One strategy for retiring farmers to consider is using a Charitable Remainder Trust (CRT). The CRT is a special kind of trust that can sell assets without triggering tax liability while providing annual income for the retiring farmer. The CRT essentially spreads out the income from the sale of the assets over many years to keep the farmer in a lower tax rate bracket. Also, the CRT allows the retiring farmer to make a charitable donation to their charity of choice.
The primary component of a CRT strategy is that a CRT does not pay tax upon the sale of assets. Due to its charitable nature, a CRT can sell assets and pay no capital gains tax nor depreciation recapture tax. The retiring farmer establishes a CRT then transfers the assets they want to sell into the CRT. The CRT then sells the assets. For the strategy to work, the trust must be a CRT. A non-charitable trust will owe taxes upon the sale of the assets.
The proceeds from the sale of the assets are then invested in a financial account. The farmer works with an investment advisor to determine the desired annual income needed from the proceeds and then an appropriate investment portfolio is created. It is important to note that income calculations must include leaving at least 10% of the principal to a charity. The farmer may not receive all the income or the trust will not qualify as a charitable trust. The term of the payments from the investment portfolio cannot exceed 20 years.
After the financial account is established, the farmer will receive annual income. This income is taxed at the farmer’s individual tax rate. By paying the sale proceeds out over a number of years, the farmer’s income tax bracket can be moderated. Selling all assets in one year would likely cause the farmer to be pushed into the highest income tax and capital gains tax bracket, so spreading out the income keeps the farmer in a lower tax bracket.
Another important component of a CRT is the charitable giving requirement. As stated above, the farmer must plan to give 10% of the principal to a charity. The funds are provided to the charity when the term of the investment expires or when the farmer dies. Depending on the performance of the investment, the charity may receive more than 10% or less than 10%. The farmer must be able to show that when the investment account was established, the intention was for the charity to receive at least 10% of the original principal.
Consider the following examples, one with a CRT and one without.
Scenario without CRT. Farmer decided to retire after the 2021 crop year. Farmer owned $800,000 of machinery and $200,000 of grain. Farmer sold all the grain and machinery before the end of 2021. Farmer owed tax on $100,000 of ordinary income due to depreciation recapture on the machinery and sale proceeds of the grain. Farmer’s tax liability was $450,000 for the sale of the assets.
Scenario with CRT. Farmer established a CRT and transfered the machinery and grain into the CRT. The CRT sold the machinery and grain but did not pay tax on the sale proceeds due to its charitable status. Farmer established an annuity to pay out over 20 years. Each year Farmer receives $65,000 of income from the CRT. Farmer pays income tax on the payment but at a much lower rate than the previous scenario. At the end of the 20-year term, a charity receives $150,000 (original 10% of principal plus interest).
As the scenarios show, A CRT can save significant taxes for the retiring farmer. Also, a CRT allows a retiring farmer to make a charitable contribution to their charity of choice.
A retirement strategy using a CRT is not without its disadvantages. One disadvantage is the cost to implement the plan. A CRT plan is complicated and requires the assistance of an attorney, accountant, and financial advisor. The combined professional fees could be $25,000 or more. Another disadvantage is the inflexible nature of the plan. The CRT is an irrevocable trust; once the CRT is implemented the plan cannot be changed. If the retired farmer finds they need more income than allocated from the CRT, they are unable to make such a change.
Anyone considering retiring from farming should explore the possibility of incorporating a CRT into their plan. CRTs can save significant income taxes and provide for charitable giving, but it’s not for everyone. The potential tax savings must be enough to justify the significant costs to establish the CRT and the farmer must be willing to give up control of the sale proceeds. Retiring farmers should consult with their attorney, accountant and/or financial advisor to assess how a CRT might fit into their retirement plan.
Tags: farm transition planning, Estate Planning, legal groundwork, charitable remainder trust
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By Robert Moore, Attorney and Research Specialist, Agricultural & Resource Law Program
Anyone who has ever been an Executor of an estate knows how much paperwork is involved with administering an estate. The county probate court, which oversees the estate process, requires many filings to verify the assets the deceased person owned, determine the value of those estates and to ensure that the correct beneficiaries receive the assets. Typically, administering an estate requires the assistance of an attorney familiar with probate rules and forms.
Like any professional providing services, attorneys will expect to be paid for their estate administration services. Legal fees charged by an attorney for an estate must be approved by the probate court. Many probate courts have established a schedule of fees that provides a benchmark for attorneys. Basically, if the attorney’s legal fees are no more than the schedule of fees, the court will approve the fees. The approved probate fees vary from county to county but are usually between 1% to 6% of the value of the estate.
It is important to note that the court approved probate fees are a benchmark, not a requirement. That is, the court is not requiring an attorney to charge those rates. Instead, the court is merely stating that fees that do not exceed the benchmark will likely be approved. It is up to each attorney to determine the fee structure to implement for their services. Some attorneys may use the probate rates for fees while other attorneys may bill based on an hourly basis.
Before hiring an attorney, Executors should have a thorough discussion regarding the attorney’s fee structure. The Executor should ask if the attorney charges on an hourly basis, flat rate basis or uses the county probate rates. Based on the fee structure used, the attorney should be able to provide a good estimate of legal costs for the estate administration. If the Executor has reason to believe the fees charged by the attorney may be too high, it’s helpful to consult with other attorneys who use a different fee structure and compare.
Consider the following examples:
- The county probate court allows a 2% legal fee rate for real estate that is not sold. Joe passes away owning a $100,000 house. Joe’s Will directs the house to be inherited by his daughter. The attorney assisting with the estate administration uses fees based on the county rate. The attorney will be entitled to $2,000 in legal fees.
- Let’s change the scenario so that Joe owned a $1,000,000 farm when he passed away. The attorney will be entitled to $20,000 in legal fees.
The above examples illustrate how probate rates work and also illustrates why executors should not automatically agree to pay the probate rates. In the examples, the attorney basically does the same work – transfers one parcel of real estate to the daughter. However, because the farm was worth ten times more in value, the attorney received ten times more in legal fees.
Let’s continue the scenario.
- The Executor thinks $20,000 in legal fees to transfer the farm may be too much. The executor finds an attorney that charges hourly for estate administration, rather than using the county rates. The attorney charges $200/hour and thinks it will take about 15 hours of work to have the farm transferred to Joe’s daughter. Executor quickly decides to hire the second attorney and saves $17,000 in legal fees.
Often, probate rates can result in reasonable legal fees. Charging $2,000 to transfer a $100,000 house is probably reasonable. In some situations, particularly for smaller estates, the probate rates may be inadequate, and the attorney may seek permission from the court to charge in excess of the rates. However, for farm estates, the county rates can result in excessive legal fees. Due to the capital-intensive nature of farming, farm estates will tend to have a much higher value than typical, non-farm estates. A modest farm estate of $5 million, at a 2% probate fee rate, will result in $100,000 of legal fees. An attorney charging $250/hour would have to bill 400 hours to make those same legal fees. A $5 million farm estate is not going to take 400 hours to administer.
Executors administering farm estates should carefully evaluate legal fees charged by the estate attorney. Applying county probate rates to farm estates can result in very large legal fees. Before agreeing to accept the probate rates as the fee structure, Executors should also inquire as to what legal fees would be if charged on an hourly basis. After getting an estimate of legal fees for both fee structures, the Executor can then make an informed decision as to how best to proceed with legal counsel.
Tags: Estate Planning, farm transition planning, probate, probate fees
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In farm estate and transition planning, we caution against leaving farmland to multiple heirs as co-owners on the deed to the property. That’s because Ohio law allows any co-owner of property to seek “partition,” a legal action asking the court to either sell the property and divide sale proceeds among the co-owners or, in some cases, to physically divide the property between co-owners. If the goal of a farm family is to keep property in the family, co-ownership and partition rights put that goal at risk. A recent case from the Ohio Court of Appeals illustrates how partition can force the unwilling sale of property from a co-owner of the property.
The recent court case didn’t involve farmland, but concerned a home and four acres of land owned jointly by an unmarried couple, each on the deed to the property as co-owners with rights of survivorship. The couple separated and one remained in the home, but the two could not agree upon how to resolve their interests in the property. That led to a court case in which one co-owner asked the court to declare that the other had no remaining interest in the property. The other co-owner disagreed and filed a partition claim asking the court to sell the property and divide sale proceeds according to each person’s property interest. The trial court determined that each co-owner did have ownership interests in the property and ordered the property to be sold according to the partition law.
The trial court granted each party the right to purchase the property within 14 days before it would be sold, but neither exercised that right. After an appraisal, the court ordered the property sold and also ordered payment of the outstanding mortgage. That left the court with the challenge of determining how to divide the remaining sale proceeds according to each party’s interests in the property. A complicated analysis of payments, credit card debts, a home equity loan, rental value, and improvements to the property resulted in a final determination that granted one co-owner more of the proceeds than the other.
Both parties appealed the division of proceeds to the Twelfth District Court of Appeals, unfortunately adding more cost and consternation to resolving the co-ownership problem. The court of appeals noted that Ohio law grants a court the duty and discretion to apply broad “equitable” principles of fairness when determining how to divide property interests among co-owners in a partition proceeding. A review of the trial court’s division of the proceeds led the appeals court to affirm the lower court’s holding as “equitable,” ending the three-and-a-half-year legal battle.
Ohio’s partition statute itself provides a warning of the risk of property co-ownership. It states in R.C. 5307.01 that co-owners of land “may be compelled to make or suffer partition…” While the purpose of partition is to allow a co-owner to obtain the value of their property interests, it can certainly force others to “suffer.” If a co-owner can’t buy out another co-owner, the power of partition can force the loss of farm property. As a result, family land can leave the family and a farming heir can lose land that was part of the farming operation. That’s most likely not the outcome parents or grandparents expected when they left their farmland to heirs as co-owners.
Fortunately, legal strategies can avoid the risk of partition. For example, placing the land in an LLC removes partition rights completely, as the land is no longer in a co-ownership situation—the LLC is the single owner of the land. The heirs could have ownership interests in the LLC instead of in the land, so heirs could still receive benefits from the land. The LLC Operating Agreement could contain rules about if and how land could be sold out of the LLC, and could ensure terms that would allow other LLC members to buy out another member’s ownership interests. An agricultural attorney can devise this and other legal strategies to ensure that partition isn’t a risk to farmland or farm heirs.
Tags: parition, farm transition planning, Estate Planning, Property, co-ownership
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Whether it's to protect family farmland, bring future generations into the operation, address special needs like retirement, disability, or remarriage--taking legal steps now can make your goals for the future of your farm a reality. Farm transition planning is so important to keeping a farm and a farm family together, but it's easy to make mistakes that can bring unintended problems in the future. Consider this this list of seven common mistakes farmers make in farm transition planning:
1. Procrastination.
2. Thinking joint property titles will do.
3. Overlooking expenses at time of death.
4. Assuming no federal estate taxes.
5. Trying to be fair to all beneficiaries.
6. Failing to consider disability as well as death.
7. Avoiding communication.
We'll discuss and address all of these issues in our "Planning for the Future of Your Farm" workshops this winter. We can help you get over that procrastination hurdle, develop your goals, deal with communication issues and understand legal strategies. Join me, attorney Robert Moore, and farm management educator David Marrison for either a day-long live program or a four-part live webinar this winter, where we cover these topics:
- Developing goals for estate and succession planning
- Planning for the transition of control
- Planning for the unexpected
- Communication and conflict management during farm transfer
- Legal tools and strategies
- Developing your team
- Getting your affairs in order
- Selecting an attorney
Dates and locations for the workshops are:
- Live Zoom webinar on January 31 and February 7, 21 and 28 from 6:30--8:30 pm.
- Because of its virtual nature, parents, children, and grandchildren can easily attend this workshop, regardless of where they live!
- Day-long in-person workshops:
- February 10, 2022--OSU Extension Greene County, Xenia, Ohio
- February 25, 2022--OSU Fisher Auditorium, Wooster, Ohio
- March 4, 2022--Wood County Fairgrounds, Bowling Green, Ohio
Pre-registration is necessary for all workshops. For registration and further information, visit this link: go.osu.edu/farmsuccession. Together, let's make 2022 the year that you make plans for the future of your farm.
Tags: farm transition planning, Estate Planning, planning for the future of your farm, succession planning
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