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A common question related to farm business planning is: should I put my machinery in a separate LLC for liability protection? Like most answers to legal questions, the answer is “it depends”. Let’s discuss this issue further.
First, let’s look at the strategy behind using a machinery LLC. Machinery is put into an LLC and then the farming operation leases the machinery from the LLC. The idea is that if the machinery is involved in a liability incident, such as an accident on the road, the liability is trapped in the machinery LLC and does extend to the farming operation or other assets.
Unfortunately, strategy and reality are not always the same. Machinery LLCs do provide some liability protection but do have definite limitations. The problem is that the source of the liability may be the operator of the machinery, not the machine itself. If the liability is due to operator error, the liability will likely come back to the operator. If the operator is working on behalf of the farming operation, the liability can and likely will come back to the farming operation. Let’s look at an example:
Farmer operates a grain farm and often has large equipment traversing narrow roads. Understandably, Farmer is concerned about the potential liability of the machinery. He places his machinery in Machinery LLC. Farmer leases the machinery from Machinery LLC.
After the LLC is established, Farmer’s employee is moving the corn planter from one field to another and is involved in a traffic accident. It is determined that employee was at fault for the accident.
Machinery LLC, in this situation, will probably not provide much liability protection. The source of the liability for the accident is not the machine but the operator. So, liability follows the operator which brings the liability back to the farming operation. Farmer’s farming operation is at risk to the liability caused by the accident.
If the accident referred to above was caused solely by a failure of the machine and not operator error, then the LLC would provide liability protection to the farm operation. However, most accidents involving farm machinery are due to operator error rather than machinery malfunction.
LLCs can provide liability protection, even if operator error causes the liability, but they must be operated in a very specific manner that will require considerably more management. To maximize liability protection, the LLC must be the employer of the machine operator. The farm operation then contracts with the machinery LLC to essentially provide custom operations. This strategy requires separate payrolls for both the farming operation and the machinery LLC and tracking which employee is working for which business. Frankly, this strategy is not feasible for most farm operations.
Where this strategy does sometimes work is with grain trucks. An LLC can be established for holding the grain trucks. The truck LLC has a payroll separate and apart from the farming operation. When an employee is hauling grain, they are paid by the trucking LLC rather than the farming operation. The farming operation pays the truck LLC a custom hauling rate. If an accident occurs while hauling grain, the farming operation has considerable protection from the resulting liability. Let’s look at an example:
Farmer sets up Truck LLC and transfers his grain trucks to the LLC. The new LLC establishes a payroll and instructs all employees to keep separate hours depending on whether they are doing farm work or trucking work. Farmer’s farm operation pays Truck LLC a custom hauling rate for all grain hauled.
Employee is hauling grain to the elevator when they cause a traffic accident. The employee and Truck LLC (as the employer) is likely to be liable for the accident. However, the farm operation is likely insulated from liability because it neither employed the driver nor owned the truck.
The above example illustrates how LLCs can be set up to maximize liability protection for farming operations. However, this maximized liability protection requires considerably more management including leases, tax returns, and separate payrolls. This situation usually works best when the farming operation has already been doing some custom hauling and is familiar with managing custom hauling contracts.
So, what do we do to overcome the limitations of LLCs? The answer is liability insurance. The most important and effective liability protection is liability insurance. Using business entities for liability protection should only ever be as backup to the liability insurance. Before spending time on machinery LLCs, farmers should take the time to review their insurance policy with their insurance agent to make sure all activities and assets are covered. There is no substitute for good liability insurance.
While machinery LLCs have limitations for liability protection, there are still many reasons they may be beneficial to a farm operation. The following are a few benefits of machinery LLCs:
- Consolidation of ownership. It is common for different family members to own different pieces of equipment or to share ownership in equipment. Over time this can become complicated and cumbersome. For convenience and easier management, it can be beneficial to put all machinery in one LLC and then each family member receives an ownership interest in the LLC.
- Transition planning. It is very easy to transfer ownership in an LLC –essentially just signing a piece of paper. In situations where we may want to transfer the ownership of machinery over time, LLCs are a great method to do this.
- Avoiding probate. Machinery is untitled so cannot be made transfer on death to avoid probate. However, the ownership interests of a machinery LLC can be transfer on death avoiding probate. By transferring machinery to an LLC then making the LLC ownership transfer on death, probate can be avoided on machinery.
- Tax planning. LLCs can be taxed as partnerships, C-Corporations, S-Corporations or sole proprietorships. The flexibility of the LLC tax structure can allow for creative tax planning.
Machinery LLCs do provide at least some liability protection for farming operations but in many situations the protection may be limited. However, there are many other good reasons to consider establishing a machinery LLC. Discuss the strategies and their advantages and disadvantages with your legal and tax advisors to determine if a machinery LLC may be the best strategy for you.
The fifth season of our Farm Office Live webinar will kick off at the Farm Science Review next Thursday, September 19, 2024. Grab a cup of coffee and join us from 10:00 a.m. to Noon for updates from the legal and farm management experts on OSU's Farm Office team.
Here are the topics we'll address live from the Farm Science Review:
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Crop Inputs and Budgets Outlook for 2025
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Extreme Weather Management, featuring guest Aaron Wilson, OSU's Ag Weather and Climate Field Specialist
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USDA Drought Assistance Programs
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Legal Update
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OSU Custom Rates
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Quarterly Fertilizer Price Summary
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Retirement Planning
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1099 Employees
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Quicken vs Quickbooks
Register for our Farm Office Live webinars, which will continue through next April, through this link on farmoffice.osu.edu.
By: David Marrison, OSU Extension Field Specialist - Farm Management and Aaron Wilson, OSU Extension Ag Weather and Climate Field Specialist
Click here for PDF version of article
Drought conditions started in Ohio back in mid-June and have intensified all summer. According to the U.S. Drought Monitor report on August 27, 2024, D4-exceptional drought was introduced to Ohio (Meigs and Athens Counties) for the first time since the U.S. Drought Monitor’s inception in 2000. On September 5, D4 increased to 7.35% of the state, while other categories of drought (D1-D3) significantly expanded. It is important to remember that D4 conditions only occur once every 50 to 100 years.
Despite much needed rainfall occurring last week from Meigs and Athens counties to Belmont County, it was not enough to overcome the drought conditions made worse by scorching heat with many days with high temperatures in the mid to upper 90s. Farther north, very little rain fell in August or during the summer. At the Zanesville Municipal Airport for example, only 0.17” of rain fell in August and 4.95” fell in June-August. This marks the driest August on record and second driest summer for this location for the period 1946-2024. Similar conditions are present for many counties across south central and east central Ohio.
Impacts are numerous and widespread including very poor pasture conditions, lack of hay growth, low ponds, dry creeks, water hauling, and failing crops. Even for counties in lower drought categories, drought stress is present with early changing leaves on trees and stress on native plants. With drought conditions expanding nearly statewide, there will be increased combine and field fire risk this harvest season as well.
The Secretary of the United States Department of Agriculture (USDA) issued two natural disaster designations (August 30 and September 3) which designated 23 counties as primary disaster counties with an additional 16 counties classified as contiguous. According to the U.S. Drought Monitor, these counties suffered from a drought intensity value during the growing season of 1) D2 Drought-Severe for eight or more consecutive weeks or 2) D3 Drought-Extreme or D4 Drought-Exceptional. The following are the counties which have been designated as of September 3.
Primary counties eligible in Ohio: Athens, Belmont, Fairfield, Fayette, Gallia, Guernsey, Harrison, Highland, Hocking, Jackson, Jefferson, Madison, Meigs, Monroe, Morgan, Muskingum, Noble, Perry, Pickaway, Pike, Ross, Vinton and Washington counties.
Contiguous counties also eligible in Ohio: Adams, Brown, Carroll, Champaign, Clark, Clinton, Columbiana, Coshocton, Franklin, Greene, Lawrence, Licking, Scioto, Tuscarawas, and Union counties.
These designations allow the USDA Farm Service Agency (FSA) to extend assistance to agricultural producers through a variety of programs. These programs are available to both new and existing users of FSA services. Please note that each program has eligibility requirements and payment limitations.
Below are short descriptions for each of the drought assistance programs:
Emergency Loan Program: This program provides emergency loan assistance to farm operators. These loans can be used to meet various recovery needs including the replacement of essential items such as equipment or livestock, reorganization of a farming operation, or to refinance certain debts. For production losses, a 30% reduction is required to be eligible. Losses to quality may also be eligible for assistance. Producers can borrow up to 100 percent of actual production or physical losses to a maximum amount of $500,000. The deadline for producers in designated primary and contiguous counties to apply for loans is between April 21 -28, 2025 depending on the county. Complete details about ELP can be found at: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/2019/emergency-loan-program.pdf
Disaster Set-Aside Program (DSA): This program allows FSA borrowers to set aside of one payment due to qualified disaster. Each payment set-aside must be repaid prior to the final maturity of the note. Any principal set-aside will continue to accrue interest until it is repaid. The borrower must be current or not more than 90 days past due on any FSA loan when the application is completed. Borrowers have 8 months from date of the disaster designation to apply. More details about the DSA program can be found at: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/2019/disaster-set-aside-program-factsheet-19.pdf
Noninsured Disaster Assistance Program (NAP): This program provides financial assistance to producers of non-insurable crops that have lower yields or crop losses due to natural disasters such as drought. Eligible crops must be commercially produced agricultural commodities for which crop insurance is not available. Such crops include (but are not limited to): crops grown for food; crops planted and grown for livestock consumption, such as grain and forage crops; specialty crops, such as honey and maple sap; value loss crops, such as aquaculture, Christmas trees, and ornamental nursery and turf-grass sod. Eligible producers must have purchased NAP coverage for the current crop year. NAP payments are limited to $125,000 per crop year, per individual or entity for crops with basic coverage. Any NAP payments received with additional (buy-up) coverage is to $300,000. More information about NAP can be found at: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/noninsured_crop_disaster_assistance_program-nap-fact_sheet.pdf
Tree Assistance Program (TAP): This program provides financial assistance to qualifying orchardists and nursery tree growers to replant or rehabilitate eligible trees, bushes, and vines damaged by natural disasters such as drought. To be eligible, at least a 15 percent mortality loss, after normal mortality, must be determined due to a natural disaster. Payment is the lessor of either 65% of the actual cost of replanting or the maximum eligible amount established by FSA. Replacement of eligible trees, bushes and vines must be made within 12 months. More information about TAP can be found at: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/tree_assistance_program-tap-fact_sheet.pdf
Conservation Reserve Program (CRP) Haying and Grazing: FSA permits emergency haying and grazing on certain CRP practices in a county designated as D2 or higher on the U.S. Drought Monitor, or in a county where there is at least a 40 percent loss in forage production. It should be noted that before haying and grazing, producers should contact their FSA office to determine if the county remains eligible and to obtain a modified conservation plan. After a county is approved for emergency haying and grazing, conditions are reviewed monthly to determine whether continuing the emergency activities is warranted. To date, 31 counties in Ohio are eligible. These can be found in Table 1
Table 1: Ohio Counties Eligible for Emergency CRP Grazing
|
County |
State Date |
|
County |
Start Date |
|
County |
Start Date |
|
Adams |
8/20/2024 |
|
Greene |
9/03/2024 |
|
Muskingum |
7/16/2024 |
|
Athens |
7/16/2024 |
|
Guernsey |
7/16/2024 |
|
Noble |
7/16/2024 |
|
Belmont |
7/16/2024 |
|
Harrison |
7/30/2024 |
|
Perry |
7/23/2024 |
|
Brown |
8/20/2024 |
|
Highland |
7/30/2024 |
|
Pickaway |
7/16/2024 |
|
Carroll |
8/20/2024 |
|
Hocking |
7/23/2024 |
|
Pike |
7/30/2024 |
|
Champaign |
9/03/2024 |
|
Jackson |
7/30/2024 |
|
Ross |
7/16/2024 |
|
Clark |
9/03/2024 |
|
Jefferson |
7/23/2024 |
|
Scioto |
8/20/2024 |
|
Clinton |
8/20/2024 |
|
Lawrence |
12/19/2023 |
|
Tuscarawas |
7/30/2024 |
|
Coshocton |
9/03/2024 |
|
Licking |
8/27/2024 |
|
Union |
9/03/2024 |
|
Delaware |
9/03/2024 |
|
Madison |
7/16/2024 |
|
Vinton |
7/23/2024 |
|
Fairfield |
7/16/2024 |
|
Meigs |
7/16/2024 |
|
Washington |
7/16/2024 |
|
Fayette |
7/16/2024 |
|
Montgomery |
9/03/2024 |
|
Warren |
9/03/2024 |
|
Franklin |
7/16/2024 |
|
Monroe |
7/16/2024 |
|
|
|
|
Gallia |
7/30/2024 |
|
Morgan |
7/16/2024 |
|
|
|
More information about the emergency grazing of CRP acreage can be found at: https://www.fsa.usda.gov/programs-and-services/conservation-programs/conservation-reserve-program/emergency-haying-and-grazing/index
Livestock Forage Disaster Program (LFP): This program provides compensation to eligible livestock producers who have suffered grazing losses due to drought on land that is native or improved pastureland with permanent vegetative cover or that is reported on the FSA-578 with initial intended use of grazing. This program looks at acreage and intended use directly from the producer certified FSA-578 form. This program also provides compensation for eligible livestock. Eligible livestock must be animals that receive the majority of their net energy requirement of nutrition via grazing. Covered livestock include beef cattle, dairy cattle, deer, equine, goats, llamas, and sheep. The 2018 Farm Bill established a maximum annual per person and legal entity payment limitation for LFP of $125,000. More details about the LFP program can be found at: https://www.fsa.usda.gov/programs-and-services/disaster-assistance-program/livestock-forage/index
Livestock Indemnity Program (LIP): This program benefits to livestock owners or contract growers for livestock deaths in excess of normal mortality caused by adverse weather. Note that drought is not an eligible adverse weather event except when death loss is associated with anthrax which occurs because of the drought. In addition, Mycoplasma Bovis is an eligible loss during drought for bison. Payment levels are based on national payment rates that are 75% of the market value of applicable livestock. Cattle, poultry, swine and other livestock are covered. More information about LIP can be obtained at: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/livestock_indemnity_program_lip-fact_sheet.pdf
Emergency Assistance for Livestock, Honeybees, and Farm-Raised Fish (ELAP): This program provides emergency assistance to eligible producers of livestock, honeybees, and farm-raised fish for losses due to disease, or adverse weather not covered by the Livestock Forage Disaster Program and the Livestock Indemnity Program. Assistance is provided for losses resulting from the cost of transporting water to livestock and hauling livestock to forage or other grazing acres due to a qualifying drought. For commercial bee producers, ELAP provides for additional feed purchased to sustain honeybees during drought conditions when natural feed is not available. ELAP also assists farm-raised fish operations for excess mortality and excessive feed requirements due to eligible weather conditions. Learn more about each facet of the ELAP program at:
- Livestock- https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/elap-livestock-fact-sheet.pdf
- Honeybees- https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/2022/fsa_elaphoneybeefact_sheet-22.pdf
- Farm-raised fish- https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/2022/elap_farmraisedfish_factsheet-2022-final.pdf
Emergency Conservation Program (ECP): This program provides funding and technical assistance for farmers and ranchers to restore farmland damaged by natural disasters and for emergency water conservation measures in severe droughts. Specific assistance can be sought for providing emergency water during periods of severe drought to grazing and confined livestock or through existing irrigation systems for orchards and vineyards. Additional details about ECP program can be found at: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/emergency-conservation-program-ecp-fact_sheet.pdf
Disaster Assistance Discovery Tool: FSA has developed an on-line disaster assistance discover tool which allows producers to learn the USDA assistance programs which might fit their operation due to this year’s drought. This easy-to-use tool can be accessed at: https://www.farmers.gov/protection-recovery/disaster-tool
Take Action and Report: Producers are encouraged visit their local Farm Service Agency office to report crop and livestock losses. By providing this data, producers can learn their eligibility for the FSA disaster programs. Additionally, this data can serve as a catalyst for potential ad hoc disaster relief programs for crops and livestock which are not covered by an existing program.
More information: Producers are encouraged to contact their local Farm Service Agency office to explore program which they may be eligible. Producers can locate their local office at: www.fsa.usda.gov/oh
References:
OSU Drought Response Page. Accessible at: https://kx.osu.edu/page/early-drought-response
US Drought Monitor. Accessible at: https://droughtmonitor.unl.edu/
Emergency Loan Programs. United States Department of Agriculture, Farm Service Agency. Source: https://www.fsa.usda.gov/programs-and-services/farm-loan-programs/emergency-farm-loans/index
Disaster Set-Aside Program. United States Department of Agriculture, Farm Service Agency. Source: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/2019/disaster-set-aside-program-factsheet-19.pdf
Noninsured Crop Disaster Assistance Program. United States Department of Agriculture, Farm Service Agency. Source: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/2023/fsa_nap_noninsuredcropdisasterassistance_factsheet_2023.pdf
Tree Assistance Program. United States Department of Agriculture, Farm Service Agency. Source: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/tree_assistance_program-tap-fact_sheet.pdf
Emergency Haying and Grazing. United States Department of Agriculture, Farm Service Agency. Source: https://www.fsa.usda.gov/programs-and-services/conservation-programs/conservation-reserve-program/emergency-haying-and-grazing/index
Livestock Forage Disaster Program. United States Department of Agriculture, Farm Service Agency. Source: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/fsa_lfp_livestockforageprogramfactsheet_2022.pdf
Livestock Indemnity Program. United States Department of Agriculture, Farm Service Agency. Source: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/livestock_indemnity_program_lip-fact_sheet.pdf
Emergency Assistance for Livestock, Honeybees, and Farm-Raised Fish Program. United States Department of Agriculture, Farm Service Agency. Source: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/elap-general-fact-sheet.pdf
Emergency Conservation Program. United States Department of Agriculture, Farm Service Agency. Source: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/emergency-conservation-program-ecp-fact_sheet.pdf
Disaster Assistance Discovery Tool. United States Department of Agriculture, Farm Service Agency. Source: https://www.farmers.gov/protection-recovery/disaster-tool
USDA Designates Meigs County, Ohio as Primary Natural Disaster Areas for Drought – with Additional Ohio and West Virginia Counties Eligible as Contiguous Counties. Source: https://www.fsa.usda.gov/state-offices/Ohio/news-releases/2024/usda-designates-meigs-county-ohio-as-primary-natural-disaster-areas-for-drought-with-additional-ohio-and-west-virginia-counties-eligible-as-contiguous-counties-
Twenty-Two Ohio Counties Declared a Primary Natural Disaster Area Due to Drought; Additional Ohio and West Virginia Counties are Eligible as Contiguous Counties. Source: https://www.fsa.usda.gov/state-offices/Ohio/news-releases/2024/twenty-two-ohio-counties-declared-a-primary-natural-disaster-area-due-to-drought-additional-ohio-and-west-virginia-counties-are-eligible-as-contiguous-counties-
Twenty West Virginia Counties Declared a Natural Disaster Area Gallia and Meigs Counties in Ohio are Eligible as Contiguous Counties. Source: https://www.fsa.usda.gov/state-offices/Ohio/news-releases/2024/twenty-west-virginia-counties-declared-a-natural-disaster-area-gallia-and-meigs-counties-in-ohio-are-eligible-as-contiguous-counties-
Attorneys, business developers, and accountants will soon gather in Columbus, Ohio, to learn about cooperative law under the theme “Building a Cooperative Economy Together" on September 17 and 18, 2024. National and regional experts — including Terry Lewis, Esq., and Dr. Jessica Gordon Nembhard, both members of the Cooperative Development Foundation’s Cooperative Hall of Fame — will lead sessions about the foundations of cooperative law and advanced topics like bylaws drafting, tax considerations, and capitalization tools. Find a full agenda at go.osu.edu/cooplaw.
The conference is organized by a collaborative group of developers and practitioners from across the region, including OSU's Center for Cooperatives. The group hopes the conference will help professionals new to the cooperative business model learn and build connections, while also helping professionals already working with cooperatives grow their skills.
“As our team works with emerging cooperatives, we’ve found it can be challenging for cooperators to find reliable information and resources about cooperative law. And many professionals have limited opportunities to learn about the cooperative business model’s unique legal, tax, and financial structure. We hope this conference can help start to fill that gap,” shared Hannah Scott, program director of the CFAES Center for Cooperatives.
Legal Aid of Southeast and Central Ohio, on behalf of the Alliance of Ohio Legal Aids, has applied to the Supreme Court of Ohio for Continuing Legal Education (CLE) credit for Ohio attorneys attending the Co-op Law Conference. More information about CLE is available on the conference website at go.osu.edu/cooplaw.
Learn more about the CFAES Center for Cooperatives at The Ohio State University at go.osu.edu/cooperatives.
We are back with another edition of the Ag Law Harvest, where we bring you rulings, laws, and regulations that affect the agricultural industry. This month's Ag Law Harvest is bringing the heat with H-2A wage rule injunctions, cultivated meat ban challenges, sales and use tax issues, and an emergency order from the EPA.
Federal Judge in Georgia Blocks H-2A Wage Rule for Named Plaintiffs. A Georgia federal judge has limited the U.S. Department of Labor's enforcement of a rule titled "Improving Protections for Workers in Temporary Agricultural Employment in the United States" (the “Final Rule”). This rule, challenged by 17 states led by Kansas and Georgia, as well as by Miles Berry Farm and the Georgia Fruit and Vegetable Growers Association (the “Plaintiffs”), is claimed to be unconstitutional. The Plaintiffs argued that the Final Rule violates the 1935 National Labor Relations Act (the “Act”) by granting H-2A farmworkers greater organizing and collective bargaining rights than those afforded to U.S. citizen agricultural workers, effectively bypassing the Act. The U.S. District Court in Georgia sided with the plaintiffs, ruling that the Department of Labor's Final Rule improperly creates a right that Congress did not intend and did not create by statute. The court emphasized that administrative agencies, including the DOL, cannot create laws or rights that Congress has not established. The court criticized the DOL for overstepping its authority, stating that while the DOL can assist Congress, it cannot assume the role of Congress. The court granted a preliminary injunction prohibiting the DOL from enforcing the Final Rule, but only for the Plaintiffs. Thus, the preliminary injunction will only apply in Georgia, Kansas, South Carolina, Arkansas, Florida, Idaho, Indiana, Iowa, Louisiana, Missouri, Montana, Nebraska, North Dakota, Oklahoma, Tennessee, Texas, and Virginia. The injunction will also apply to Miles Berry Farm and the Georgia Fruit and Vegetable Growers Association. We will keep you updated as the case goes up on appeal and how this ruling affects other H-2A lawsuits across the country.
Florida Cultivated Meat Ban Challenged. A California business has filed a federal lawsuit against the state of Florida, challenging a law that bans the sale of cultivated meat. The company argues that Florida's prohibition is unconstitutional, claiming it violates their right to engage in interstate commerce by restricting their ability to sell their products across state lines. Upside Foods, Inc., the California based company, alleges that Florida Senate Bill 1084 (“SB 1084”), which bans the manufacture, distribution, and sale of cultivated meat, violates the U.S. Constitution’s Supremacy Clause because SB 1084 “is expressly preempted by federal laws regulating meat and poultry products.” Furthermore, Upside Foods alleges that SB 1084 violates the U.S. Constitution’s Dormant Commerce Clause because SB 1084 “was enacted with the express purpose of insulating Florida agricultural businesses from innovative, out-of-state competition like UPSIDE.” Upside Foods has asked the district court in Florida to declare SB 1084 unconstitutional and to issue an injunction preventing SB 1084’s enforcement. Proponents of SB 1084 argue that the law protects Floridians, however, Upside Foods alleges that the Florida ban isn’t meant to protect the public, rather it was passed to “protect in-state agricultural interests from out-of-state competition.”
Board of Tax Appeals Finds Utility Vehicle Not Exempt Under Agricultural Sales Tax Exemption. Claugus Family Farm LP (CFF), an Ohio timber farm, purchased a 2015 Mercedes-Benz utility vehicle and claimed it was exempt from sales tax under Ohio’s Agricultural Sales Tax Exemption. After an audit, the Ohio Department of Taxation assessed the sales tax on the vehicle. CFF petitioned for reassessment, but the Ohio Tax Commissioner determined that CFF did not provide enough evidence to prove the vehicle was primarily used for farming as required by law. CFF then appealed to the Ohio Board of Tax Appeals, arguing that the vehicle was mainly used for farming operations, such as transporting people around the farm, monitoring tree health, applying pesticides, maintaining equipment, and carrying supplies. CFF claimed the vehicle was used 95% of the time on farming activities. Upon review, the Board of Tax Appeals noted that “the use of vehicles for transportation around a farm, as well as general uses such as delivering parts and cutting and hauling of wood and brush, do not constitute direct farming activities.” The Board held that the vehicle was used primarily for these purposes and not directly in farming and thus found the vehicle to be subject to Ohio’s sales and use tax.
EPA Emergency Order Suspends Use of Pesticide DCPA/Dacthal. On August 7, 2024, the U.S. Environmental Protection Agency (“EPA”) issued an Emergency Order immediately suspending the registration and use of all pesticides containing dimethyl tetrachloroterephthalate (“DCPA” or “Dacthal”). The EPA cited the danger the substance poses to pregnant women and unborn babies. The agency determined that the continued sale, distribution, or use of DCPA products during the cancellation process would present an imminent hazard, justifying the emergency suspension without a prior hearing. Despite efforts by AMVAC Chemical Corporation, the sole registrant of DCPA products, to address these concerns, the EPA concluded that no practicable mitigations could make the use of DCPA safe.
Tags: ag law harvest, H-2A, pesticides, EPA, Cultivated Meat, U.S. Constitution, Ohio Sales Tax, Agricultural Sales Tax Exemption, Ag Law, Farm Law
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We mourn the passing of Paul L. Wright, an agricultural attorney, mentor, leader, professor, farmer advocate, and the founder of our OSU Agricultural Law Program. Paul passed on August 17, 2024, due to cancer.
I remember receiving my first letter from Paul Wright. I had sent him my resume with the hope he and law partner Tony Logan would hire me for their law firm, Wright & Logan. I was a young attorney and I knew about Paul Wright and his respected reputation as an agricultural attorney. Paul sent me a return letter encouraging my interest in agricultural law and requesting an interview. A few months later, I was working with Paul. That letter gave me the opportunity I so badly wanted, and I’ve held onto it for years.
Paul didn’t set out to become an agricultural law attorney, his passion for agriculture led him there. He grew up on a farm in Coshocton County, Ohio, was active in 4-H and vocational agriculture, and decided to pursue a degree in agricultural education at Ohio State. He then began his career in 1959 as the county 4-H agent for OSU Extension in Madison and Clinton counties. But it didn’t take long for him to recognize his curiosity and natural aptitude for farm management and agricultural economics. While he was completing a Master of Science degree in Agricultural Economics, OSU Extension promoted Paul into a Farm Management Area Extension Agent position in Fremont, Ohio.
Paul once told me how his work as a Farm Management Specialist for OSU kept pulling him into legal issues, and that he felt compelled to try to solve those issues for farmers. I can easily imagine that, as his desire to help farmers seemed always at the front of his mind. That desire took him to the University of Toledo College of Law for a law degree, and he soon transitioned to become the first Agricultural Law Specialist for Ohio State University, a faculty member in what was then the Department of Agricultural Economics. He shared stories with me about his days of driving across Ohio to teach at farm meetings, equipped with boxes of files, articles he had written, and “overhead transparencies.” Paul said he always tried to be prepared for “whatever legal issue they might want to talk about.” He loved teaching about those legal issues and resolving problems and questions from farmers. In addition to teaching farmers, Paul also established the first agricultural law course at Ohio State, a course still offered to undergraduate students in the College of Food, Agricultural, and Environmental Sciences.
With his knowledge in both law and economics, Paul and Ohio State were well equipped to help farmers during the economic crisis that hit farming in the mid-1980s. He talked with me about the often painful meetings and kitchen table sessions he had with farmers back then and that despite his knowledge, he again felt the need to do more for farmers. He began connecting with other attorneys across the Midwest and eventually, those connections resulted in the formation of the American Agricultural Law Association—the first official recognition of lawyers who work in agriculture as “agricultural attorneys.” Paul shared that he and other founding members of AALA recognized the role they could fill for farmers and the need to constantly expand their knowledge base and broaden the network of agricultural attorneys and other professionals who could help farmers. He taught for educational sessions at AALA annual conferences, served on committees and the Board of Directors, and was elected to a term as the AALA President. In 1994, the AALA awarded Paul its highest honor, the Distinguished Service Award.
For years, Paul maintained connections with AALA colleagues across the country and met regularly with a group of AALA friends who constantly identified and analyzed issues and needs in agricultural law. When he brought me into that community of colleagues, I always walked away learning something I could use in my work as an agricultural attorney. That type of networking was a common practice for Paul that provides us wisdom today. In his 1998 presidential address to the AALA, Paul challenged association members to become better attorneys through networking within the agricultural community. “I wonder how many differences are grounded in a lack of thorough communication, or a lack of taking the time to create a forum to really hear another’s thoughts and knowledge,” Paul stated. “With confidences and resources, there is hardly an agricultural law issue that cannot be refined and improved as a result of networking.”
Paul retired from OSU in 1988, but many in Ohio know that Paul’s career didn’t end at that point. He wanted to be a private attorney who could personally advise the farm community. Paul partnered with Tony Logan to form the law firm of Wright & Logan, which was likely the first “agricultural law firm” in Ohio focused on representing farmers. That's when I met Paul and joined the firm. As a young attorney working with Paul, I lived in both awe and fear—awe for all he had accomplished in agricultural law and fear that I would not live up to his knowledge level and standards. To the contrary, Paul always encouraged and taught me. I often struggled to keep up with his expertise, but he never expressed disappointment in me.
Wright & Logan later transitioned to Wright Law Co., LPA. When Robert and Kelly Moore joined, the law firm became the current Wright & Moore Co., LPA, now led by Ryan Conklin. Like the farmers he admired, Paul never completely retired from Wright & Moore but continued in an “Of Counsel” capacity and served clients up to his death. In his private law practice, I’d estimate that Paul served hundreds of farm families and prepared hundreds of business, estate and transition plans. He was well known in Ohio’s agricultural community and had clients that stretched across the state. I wonder how many times farmers and others have asked me, “do you know Paul Wright?” and how many times my answer of “yes, I used to work for him” opened doors for me and gave me immediate credibility. In Ohio’s agricultural community, Paul was a celebrity.
The Ohio agricultural community honored Paul by inducting him into the Ohio Agricultural Hall of Fame in 2006. I recall receiving an invitation from Paul to sit at his table for the induction ceremony. He was nervous, excited, and humbled. It was something I had witnessed before with Paul, when Ohio State recognized him with its Distinguished Alumni Award in 2003. Those awards meant so much to him, and he said once that he couldn’t believe a farm boy who had spent his time fixing fences in Coshocton County could ever be so fortunate to have the career and recognition he had.
Paul’s career, recognition, and impact on Ohio agriculture certainly won’t end with his passing. Being the meticulous and creative estate planner he was, Paul developed a succession plan for agricultural law in Ohio. In 2006, he established an endowment with OSU’s College of Food, Agricultural & Environmental Sciences to further agricultural law and farm management education in Ohio. Having followed in Paul’s footsteps as the agricultural law specialist at OSU, I have been able to use Paul’s funds in the OSU Agricultural & Resource Law Program to provide educational programs for attorneys, farmers and Extension educators and scholarships for law students and undergraduate students interested in agricultural law. Paul's goal was to ensure a long-lasting commitment to agricultural law and farm management at Ohio State, and his endowment will carry that goal well into the future.
I’ve thought of trying to locate that old worn letter I received from Paul when I asked him to hire me. That letter, and knowing Paul, changed my life. Because of Paul, I and many of my colleagues can repeat his words about the unbelievable fortune of being an agricultural attorney in Ohio. But I don’t need the letter to remind me of Paul, as his presence has always and will always be embedded in me, in others he has mentored, in Ohio State, and in Ohio’s agricultural community. The loss is immeasurable, but so is the legacy he left us.
Tags: Paul L. Wright, Paul Wright, Agricultural Law
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In the last post, we discussed the different types of life insurance. In this post we will explore the benefits and disadvantages of life insurance in farm transition planning as well as strategies for using life insurance.
The Value of Life Insurance in Farm Estate Planning
Liquidity for Estate Taxes and Debts:
When a farm estate is passed on to the next generation, estate taxes and debts can create significant financial burdens. Life insurance provides the liquidity needed to cover these expenses, helping to prevent the forced sale of farm assets.
Equalization Among Heirs:
In many farm families, not all heirs are involved in daily farm operations. Life insurance can be used to compensate non-farming heirs, ensuring fairness while preserving the farm for those who continue the operation.
Succession Planning:
For farmers transferring ownership of the farm to the next generation, life insurance can be a crucial part of succession planning. It provides the financial resources to buy out other heirs or business partners, ensuring a smooth ownership transition.
Protection Against Loss:
In the event of the sudden death of a key family member, life insurance can provide the necessary funds to keep the farm operational during the transition period.
Disadvantages of Life Insurance in Farm Estate Planning
Cost of Premiums:
Life insurance, particularly permanent policies like whole or universal life, can be costly. The ongoing premium payments may strain the farming business, especially if cash flow is tight. Also, the premiums are not usually a deductible business expense.
Insurability:
Not everyone qualifies for life insurance. Individuals with pre-existing health conditions may be denied coverage. Additionally, as the applicant ages, premiums increase, potentially becoming unaffordable at some point.
Complexity of Policies:
Permanent life insurance policies, such as universal or variable life, can be complex and require careful management. Without proper oversight, these policies may lapse, resulting in the loss of coverage and forfeiture of premiums paid.
Limited Cash Flow Benefits:
While life insurance provides liquidity at death, it may not offer significant cash flow benefits during the policyholder's lifetime. Cash value accumulation can be slow, particularly in the early years.
Examples of Using Life Insurance in Farm Transition Planning
Off-Farm Heirs:
Andy and Betty own Family Farms. Their son Chris has returned to manage the farm, while their daughter Darla has pursued a successful career elsewhere and is not involved in the farming operation. Andy and Betty have a net worth of $3 million, but most of it is tied up in the farm, leaving little liquid cash. They purchase a second-to-die policy for $1 million and name Darla as the beneficiary. Upon their deaths, Darla will receive the $1 million death benefit as her inheritance, while Chris will inherit the farm, ensuring he can continue the operation without financial strain. This plan balances the needs of both heirs, providing liquidity to the off-farm heir while preserving the farm for the on-farm heir.
Debt:
Ed and Fran recently purchased a farm and owe $1 million on the property. They worry that if they die prematurely, the farm may struggle to meet the debt payments. To mitigate this risk, they purchase a second-to-die policy for $1 million. The death benefit will be used by their heirs to pay off the land debt, helping to secure the farm's future for the next generation. Any death benefit not needed to pay debt can go to their heirs.
Ownership Buyout
George and Harry are brothers who own and operate Family Farms LLC. They expect to continue farming for another 10 years. If either George or Harry die while they are farming, they want the surviving brother to be able to continue the farming operation by buying out the deceased brother’s ownership. The LLC is valued at $2 million. The brothers want $1 million to go to their family upon their death but do not want to burden the other brother with $1 million of debt.
George and Harry purchase $1 million, 10-year term policies for each other. If either brother dies in the next ten years, the surviving brother will receive $1 million death benefit which will be used to buy the deceased brother’s ownership. The $1 million in sale proceeds will go to the deceased brother’s family. The surviving brother will not need to worry about taking on debt to make the buyout. By using term policies, George and Harry were able to provide buyout funds while keeping the premiums costs significant lower than a whole life, universal or variable policy.
Effect on Estate Taxes
The death benefit of a policy is included in the estate of the policy owner. For example, if Ida owns a $1 million whole life policy which pays out to her beneficiaries upon her death, the $1 million death benefit will be included in her federal taxable estate. This presents a planning issue if life insurance is purchased to help pay estate taxes. Owning a life insurance policy will compound the estate tax liability of the estate.
A relatively easy solution to this issue is to use an Irrevocable Life Insurance Trust (ILIT). With this strategy, an ILIT is established that will purchase the life insurance policy. The grantor of the trust will pay the premiums on behalf of the ILIT and beneficiaries. Because the ILIT owns the policy and not the grantor, the death benefit is not included in the grantor’s estate.
Continuing the above example, Ida establishes an ILIT and the ILIT purchases a $1 million whole life policy. Ida pays the annual premiums on behalf of the ILIT. When Ida dies, the policy will pay $1 million to the ILIT. The ILIT will then distribute the $1 million to Ida’s heirs. The $1 million is not included in Ida’s taxable estate.
Conclusion
Life insurance can be a valuable tool in farm estate planning and transition or succession planning, offering liquidity, equalization among heirs, and protection against financial hardship. However, it is essential to carefully weigh the pros and cons of different policies and consider the long-term costs and management responsibilities. Life insurance is not needed for every transition plan. Farmers should consult financial advisors, estate planners, and insurance professionals to determine how life insurance may or may not fit their specific needs and goals. When structured properly, life insurance can help ensure the farm remains a viable operation for future generations while also providing financial security for heirs.
Farmers often face the challenge of being "land rich, cash poor." While they may have significant wealth tied up in land and other assets, they can lack sufficient cash to cover expenses, taxes, or distributions when planning for the farm’s transition to the next generation. This "land rich, cash poor" dilemma can complicate farm transition and succession planning, creating potential obstacles for a smooth handover of the farm.
Life insurance can provide a solution to this problem by introducing liquidity into an estate or trust, which can be used to cover expenses, taxes, and distributions to heirs. By incorporating life insurance into a farm transition plan, legal complexities and costs can be reduced, and the transition process can be streamlined. However, life insurance, like any estate planning tool, may be appropriate in some situations but not in others. This bulletin aims to explain different types of life insurance and how they can be used effectively in farm transition planning. Given the complexities of life insurance policies, it is essential to work with insurance and legal professionals to ensure that life insurance is appropriately included in your plan.
Types of Life Insurance Policies
Term Life Insurance:
Term life insurance provides coverage for a specific period (e.g., 10, 20, or 30 years). If the insured passes away during the term, the policy pays a death benefit to the beneficiaries.
- Pros: Lower premiums compared to permanent life insurance; simple and straightforward; ideal for temporary needs like covering a mortgage or debt.
- Cons: No cash value accumulation; coverage ends at the term’s expiration unless renewed, often at a higher premium; not ideal for long-term estate planning.
Whole Life Insurance:
Whole life insurance provides lifetime coverage with a guaranteed death benefit and includes a cash value component that grows over time. Typically, the premiums are fixed for the life of the policy.
- Pros: Permanent coverage with a guaranteed death benefit; cash value can be accessed through loans or withdrawals; fixed premiums for the life of the policy.
- Cons: Higher premiums compared to term life insurance; cash value grows slowly in the early years; limited flexibility in adjusting the death benefit or premiums.
Universal Life Insurance:
Universal life insurance offers permanent coverage with more flexibility than whole life. Policyholders can adjust premiums and death benefits within certain limits and earn interest on the cash value.
- Pros: Flexible premiums and death benefits; cash value accumulation with potential for higher returns; can be tailored to specific estate planning needs.
- Cons: More complex than whole life insurance; interest rates may fluctuate, affecting cash value growth; requires careful management to avoid policy lapse.
Variable Life Insurance:
Variable life insurance provides permanent coverage with investment options for the cash value. Policyholders can invest the cash value in various sub-accounts, such as stocks and bonds.
- Pros: Potential for higher returns through investment options; tax-deferred growth of the cash value; permanent coverage.
- Cons: Higher risk due to market exposure; policy performance depends on the chosen investments; requires active management and carries higher fees.
Difference Between Universal Life and Variable Life Insurance
Universal life and variable life insurance are both types of permanent life insurance, but they differ in flexibility, investment options, and risk. Universal life offers adjustable premiums and death benefits, with cash value growth based on an interest rate set by the insurer. This makes it a more predictable option with lower risk, though it offers moderate growth potential as the cash value isn't directly tied to market performance. Variable life, on the other hand, requires fixed premiums but allows policyholders to invest the cash value in various sub-accounts, offering the potential for higher returns. However, it introduces greater risk as the cash value fluctuates with the market, and there’s no guaranteed minimum cash value. Variable life policies are also more complex, requiring active management and often incurring higher fees. In summary, universal life provides predictability and flexibility, while variable life offers the potential for higher returns with greater risk and complexity.
Second-to-Die Life Insurance Policy
A second-to-die life insurance policy, also known as survivorship life insurance, covers two individuals, typically a married couple, and pays the death benefit only after both individuals have passed away.
- Pros: Second-to-die policies generally have lower premiums than two individual life insurance policies since the insurer pays out only after both insured individuals have died, reducing their risk exposure. Additionally, they are often easier to obtain for couples where one partner has health issues, as the payout depends on both individuals passing away.
- Cons: The death benefit is delayed until both individuals have passed, which may not provide financial assistance when the first spouse dies. This delay makes the policy less useful for covering immediate expenses or providing cash flow to the surviving spouse. Furthermore, second-to-die policies do not offer cash flow benefits during the policyholders' lifetimes, as the payout occurs only after death.
In the next post, we will discuss the advantages and disadvantages of life insurance as well as strategies to incorporate life insurance into a farm transition plan.
The costs of long-term care (LTC) continue to rise, creating potential financial risks for farmers who want to protect their farm assets for future generations. In the last two years alone, the cost of in-home care has increased by more than 20%, while nursing home costs have risen by 10% to 15%. According to the 2023 Genworth Cost of Care Survey, the following are the most recent costs of long-term care services:
- U.S., Home Health Aide: $75,552/year
- Ohio, Home Health Aide: $73,212/year
- U.S., Nursing Home – Semi-private room: $104,016/year
- Ohio, Nursing Home – Semi-private room: $100,380/year
These figures make it clear why long-term care costs are a significant risk to the continuity of the family farm. Even a short stay in a nursing home can incur substantial costs.
According to data from the Administration for Community Living, individuals turning 65 have a 69% chance of needing some form of LTC, with an average of three years of care required. Typically, one of these three years is spent receiving at-home care provided by spouses or family members, one year in paid at-home care, and one year in a nursing facility. For farmers needing LTC, this equates to an average of approximately $180,000 in costs per person, and double that for a married couple. However, some individuals will require more than three years of care, which can cause LTC costs to increase significantly.
Medicaid can help cover LTC costs, but it has stringent eligibility requirements. One major condition is that Medicaid limits the amount of assets an individual can own and still qualify for benefits. In Ohio, an unmarried person cannot own more than $2,000 of countable assets. Most farmers will not qualify for Medicaid without aggressive planning. Another critical factor is the five-year look-back period, during which Medicaid reviews any asset transfers made within five years of applying for coverage. If assets were gifted or transferred below market value during this period, Medicaid may impose penalties, delaying eligibility for benefits.
Given these costs, statistics, and Medicaid rules, it is crucial for farmers to explore strategies that can minimize the risk of LTC expenses depleting their farm assets. Here are some common strategies farmers can consider:
- Gifting Assets: Transferring farm assets to family members while retaining enough to cover immediate needs can help reduce exposure to LTC costs. However, this strategy should be approached with caution, as it is subject to Medicaid’s five-year look-back period.
- Irrevocable Trusts: Placing farm assets in an irrevocable trust can protect them from being considered in LTC cost calculations, ensuring that the farm remains intact for future generations. However, this plan is also subject to Medicaid’s five-year look-back period.
- Self-Insurance: Farmers with significant savings or assets may choose to self-insure by setting aside funds specifically for potential LTC expenses, thereby reducing the need to sell farm assets.
- LTC Insurance: Purchasing long-term care insurance can provide coverage for LTC costs, offering a buffer against the high expenses associated with nursing home or in-home care. However, LTC insurance can be expensive, and not everyone will qualify for coverage.
- Wait and See: This strategy involves holding back enough assets to pay for five years of LTC while awaiting Medicaid eligibility.
- Do Nothing: Some individuals with adequate income to cover LTC costs may not need to take action to protect assets.
- Combining Strategies: Often, a combination of these approaches can provide the most robust protection, balancing immediate needs with the long-term preservation of farm assets.
By understanding the risks and costs of LTC and carefully considering these strategies, farmers can take proactive steps to help ensure their farm's legacy remains intact, even in the face of unforeseen health care costs. Always consult with legal and financial advisors to tailor the best approach for your specific situation.
For more information and a detailed discussion on LTC, see The Long-Term Care and the Farm publication available at farmoffice.osu.edu.
The Western Ohio Cropland Values and Cash Rents study was conducted earlier this year from January through April. This 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. The study results are based on 131 surveys.
Respondents were asked to group their estimates based on three land quality classes: average, top, and bottom. 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 below for western Ohio with regional summaries (subsets of western Ohio) for northwest Ohio and southwest Ohio.
Results from the Western Ohio Cropland Values and Cash Rents Survey show cropland values in western Ohio are expected to increase in 2024 by 3.3 to 5.8 percent depending on the region and land class. Cash rents are expected to increase from 3.2 to 3.8 percent in 2024 depending on the region and land class. Decreasing profit margins have competed with relatively strong farm equity positions and increasing property taxes to direct values and rents so far in 2024. Cropland values and cash rents are expected to increase although they are projected to be smaller increases than the past two years.
Factors Important to 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, property taxes and specific conditions of the lease. This fact sheet summarizes the survey research data collected for western Ohio cropland values and cash rents:
https://farmoffice.osu.edu/farm-management-tools/farm-management-publications/cash-rents
Projected Estimates of Land Values and Cash Rents
Survey respondents were asked to give their best estimates for long-term land value and cash rent change. The average estimate of cropland value change in the next five years for western Ohio is an increase of 3.6 percent (for the entire five-year period). Responses for the five-year cropland value change ranged from an increase of 50 percent to a decrease of 50 percent.
The average estimate of cash rent change in the next five years is an increase of 2.7 percent. The cash rent change also had a large range, with responses ranging from an increase of 25 percent to a decrease of 50 percent.
Interest Rates
Survey respondents were also asked to estimate 2024 interest rates for two borrowing terms: 20 year fixed-rate mortgage and operating loan. The average estimate, according to survey respondents, of 20 year fixed-rate mortgage borrowing is 7.1 percent. According to the same respondents, the average estimate of operating loan interest rates is 8.3 percent.
The full survey research summary can be found at the Farm Office website: https://farmoffice.osu.edu/farm-management-tools/farm-management-publications/cash-rents