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A common question regarding farm transition planning is: “should I have a will or trust for my plan?”  Like most legal questions, the answer is “it depends”.  Sometimes a will is adequate for a plan while other plans should include a trust.  Knowing which you need requires an understanding of wills and trusts and the factors that should be considered when deciding which to implement.

A new publication, Is a Will or Trust Better for Your Farm Transition Plan?, discusses the differences between wills and trusts and provides nine factors to consider when deciding which to use for your plan.  The factors to consider are:

1. Legal fees
2. Complexity of the plan
3. Probate
4. Concerns about heirs
5. Second marriages
6. Transition of farming operation
7. Taxes
8. Privacy
9. Control

The publication analyzes each factor and how it relates to a will and trust.  After reviewing the factors, an informed decision can be made regarding implementing a will or trust into a farm transition plan.  This publication is part of an extensive library of farm transition bulletins and publications available at farmoffice.osu.edu.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Questions from farmers and farmland owners about agricultural easements are on the rise at the Farm Office.  Why is that?  From what we’re hearing, the questions are driven by concerns about the loss of farmland to development as well as desires to keep farmland in the family for future generations.  An agricultural easement is a unique tool that can help a farmland owner and farming operation meet goals to protect farmland from development or transition that land to the next generation.  Here are answers to some of the questions we’ve been hearing.

What is an agricultural easement?  An agricultural easement is a voluntary legal agreement by a landowner to use land primarily for agricultural purposes and forfeit the right to develop the land for other purposes, either permanently or, less often, for a term of years.  In an agricultural easement, a landowner grants an easement “holder” the legal right to enforce the easement against a landowner or other party who attempts to convert the land to a non-agricultural use. A written legal instrument details and documents this agreement between a landowner and the easement “holder.”  The agricultural easement instrument must be recorded in the county land records, and the agricultural easement is binding on all future landowners for the duration of its term.

A state legislature must authorize the use of the agricultural easement instrument, and Ohio’s legislature did so in 1999.  At that time, the legislature adopted a detailed legal definition of “agricultural easement” in Ohio Revised Code 5301.67(C):

"Agricultural easement" means an incorporeal right or interest in land that is held for the public purpose of retaining the use of land predominantly in agriculture; that imposes any limitations on the use or development of the land that are appropriate at the time of creation of the easement to achieve that purpose; that is in the form of articles of dedication, easement, covenant, restriction, or condition; and that includes appropriate provisions for the holder to enter the property subject to the easement at reasonable times to ensure compliance with its provisions.

The legislature also required in Ohio Revised Code 5301.68 that a landowner may only grant an agricultural easement on land that qualifies for Ohio’s Current Agricultural Use Valuation (CAUV) program under Ohio Revised Code 5713.31.

Is an agricultural easement the same as a conservation easement?  No, not in Ohio, but they share the same legal concept of dedicating land to a particular use.  Ohio also allows a landowner to grant a conservation easement, which is a promise to retain land predominantly in its natural, scenic, open, or wooded condition and forfeit the right to develop the land for other purposes.  A conservation easement might allow agricultural land uses, and an agricultural easement might allow some conservation uses.  The terms used in federal law and some other states vary from Ohio, and include “agricultural conservation easement” or “agricultural land easement.”

Who can be a “holder” of an agricultural easement?  Ohio law answers this question in Ohio Revised Code 5301.68, which authorizes only these entities to enter into an agricultural easement with a landowner:

• The director of the Ohio Department of Agriculture;
• A municipal corporation, county, or township;
• A soil and water conservation district;
• A tax exempt charitable organization organized for the preservation of land areas for public outdoor recreation or education, or scenic enjoyment; the preservation of historically important land areas or structures; or the protection of natural environmental systems (generally referred to as a “land trust” or a “land conservancy.”)

What kinds of land uses would be inconsistent with keeping the land in agricultural use?  That depends on the terms in the written deed for the agricultural easement.  Activities that might violate the agreement to maintain the land as agricultural include subdivision of the property, commercial and industrial uses, major surface alterations, and oil and gas development.  It’s typical to identify the homestead or “building envelope” area and allow new buildings, construction and similar activities within that area, but those activities might not be permitted on other parts of the land.  Review the  Ohio Department of Agriculture’s current Deed of Agricultural Easement through the link on this page:  https://agri.ohio.gov/programs/farmland-preservation-office/landowners.

Can a landowner transfer land that is subject to an agricultural easement?  Yes.  An agricultural easement does not restrict the right to sell or gift land, but it does carry over to the new landowner.  That landowner must abide by the terms of the agricultural easement.

Are there financial incentives for entering into an agricultural easement?  Yes.  There are several financial incentives:

• The Ohio Department of Agriculture’s Office of Farmland Preservation oversees the Local Agricultural Easement Purchase Program, which provides Clean Ohio grant funds to certified local sponsors to purchase permanent agricultural easements in their communities.  It’s a competitive process that requires a landowner to work with an approved local sponsor to apply for the program and to donate at least 25% of the agricultural easement’s value if selected.  A landowner can receive up to 75% of the appraised value of the farm’s “development rights,” with a payment cap of $2,000 per acre and $500,000 per farm per application period.
• Federal funds are also available through the Natural Resource Conservation Service’s Agricultural Conservation Easement Program. This program is also competitive and requires a landowner to work with an approved partner to determine eligibility and apply for easement funding.  NRCS may contribute up to 50 percent of the fair market value of the agricultural land easement.
• There are also federal income tax incentives for donating a portion or all of an agricultural easement’s value to a qualified charitable organization.  Internal Revenue Code section 170(h) allows a landowner to deduct the value of the easement up to 50 percent of their adjusted gross income (AGI) in the year of the gift, with a 15-year carryover of excess value.  That AGI percentage increases to 100% for a “qualified farmer” who earns more than 50% of their gross income from farming.
• There can also be federal estate tax benefits for land subject to a permanent agricultural or conservation easement.  The land is valued at its restricted value, which lowers the estate value.  Additionally, Section 2055(f) of the Internal Revenue Code allows donations of qualifying easements to a public charity to be deducted from the taxable value of an estate.  Up to 40% of the value of land restricted by an agricultural or conservation easement  can be excluded from the value of an estate if the easement meets Internal Revenue Code section 2031(C) provisions, limited to $500,000. 

How can a family use an agricultural easement to enable farm transition goals?  Here’s an example.  John and Sue are fourth generation owners of 250 acres of farmland they plan to leave to their child Lee, and they want the land to remain as farmland into the future.  Lee is committed to farming and wants to farm, and John and Sue would like Lee to have more land to improve the viability of the farming operation. They find a local sponsor and apply to Ohio’s Local Agricultural Easement Purchase Program, offering to donate 25% of the agricultural easement value to the program.  They are selected for the funding and receive a payment of $2,000 per acre for the agricultural easement.  They use the $500,000 in easement proceeds to purchase additional farmland for Lee.  John and Sue receive a federal income tax credit for the portion of the easement value they donated to qualify for the program, and carryover the amount until it is fully used, up to 15 years.

What are the drawbacks of agricultural easements?  There are challenges and drawbacks of agricultural easements, and we’ll discuss those in our next blog post.

Agricultural easements require legal and tax advice and careful planning.  Our short Q&A doesn’t address all of the nuances of agricultural easements.  It’s a big decision, and one that should align with current goals and estate and transition plans.  To determine if an agricultural easement works for your situation, seek the advice and planning assistance of knowledgeable legal and tax professionals.