Recent Blog Posts

By: Barry Ward, Wednesday, August 10th, 2022

High crop prices and COVID era legislative ad-hoc government payments coupled with lower interest rates (among other factors) over the last 2 and half years have given strength to farmland markets. Higher input costs over the last year and half together with rising interest rates have offset some of this strength but farmland values continue to increase. Many of these same factors have given strength to the farmland rental markets which have also seen increases this last year and will likely see additional increases in 2022.

According to the Western Ohio Cropland Values and Cash Rents Survey, cropland values in western Ohio are expected to increase in 2022 by 8.0 to 11.3 percent depending on the region and land class. This is on top of increases from 2020 to 2021 of 7.2 to 26.6 percent depending on region and productivity class.

Cash rents are expected to increase from 5.8 to 6.8 percent depending on the region and land class. This is on top of rental increases of 1.5 to 7.7 percent from 2020 to 2021.

Ohio Cropland Values and Cash Rent

Ohio cropland varies significantly in its production capabilities and, consequently, cropland values and cash rents vary widely throughout the state. Generally, western Ohio cropland values and cash rents differ from much of southern and eastern Ohio cropland values and cash rents. The primary factors affecting these values and rents are land productivity and potential crop return, and the variability of those crop returns. Soils, fertility and drainage/irrigation capabilities are primary factors that most influence land productivity, crop return and variability of those crop returns.

Other factors impacting land values and cash rents may include field size and shape, field accessibility, market access, local market prices, field perimeter characteristics and potential for wildlife damage, buildings and grain storage, previous tillage system and crops, tolerant/resistant weed populations, USDA Program Yields, population density, and competition for the cropland in a region. Factors specific to cash rental rates may include services provided by the operator and specific conditions of the lease. This fact sheet summarizes data collected for western Ohio cropland values and cash rents.

Study Results 

The Western Ohio Cropland Values and Cash Rents study was conducted from January through April in 2022. The opinion-based study surveyed professionals with a knowledge of Ohio’s cropland values and rental rates. Professionals surveyed were rural appraisers, agricultural lenders, professional farm managers, ag business professionals, OSU Extension educators, farmers, landowners, and Farm Service Agency personnel.

Respondents were asked to group their estimates based on three land quality classes: average, top, and poor. Within each land-quality class, respondents were asked to estimate average corn and soybean yields for a five-year period based on typical farming practices. Survey respondents were also asked to estimate current bare cropland values and cash rents negotiated in the current or recent year for each land-quality class. Survey results are summarized for western Ohio with regional summaries (subsets of western Ohio) for northwest Ohio and southwest Ohio.

The complete survey summary can be accessed and downloaded here on one of our Farm Office pages:

https://farmoffice.osu.edu/farm-management-tools/farm-management-publications/cash-rents

 

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Planning for the Future of Your Farm publications
By: Peggy Kirk Hall, Monday, August 08th, 2022

Farming takes planning.  A lot of planning.  Whether for next year’s crop, expanding a herd, buying land, constructing buildings, starting a new venture, or upgrading equipment, farmers are nearly always engaged in planning for how to keep the farm on track.  But  farm transition and estate planning—that is, planning for what happens to a farm business and its family from one generation to the next—is a whole different kind of planning.  And it’s one type of planning farmers often avoid.

Farm transition and estate planning can be challenging and uncomfortable, perhaps because it involves dealing with death, uncertainty, and difficult family decisions.  But like planning for the next year of production, farm transition and estate planning is critical to a farm’s success.  With good planning, a farm family can protect farm assets, implement family and business goals, and ensure a smooth transition of a viable operation to the next generation.  It’s the kind of planning that can pay off big. That's why we've written the Planning for the Future of Your Farm law bulletin series, a resource that explains the legal tools and strategies that can address a family’s goals. 

The ten-part series of bulletins in Planning for the Future of Your Farm includes:

  1. Farm Transition Planning: What it is and What to ExpectThe concept of farm transition planning, common terms, what farmers can expect from the transition planning process, and how to prepare for it.
  2. The Financial Power of AttorneyA Financial Power of Attorney authorizes someone to make financial decisions for another.  We explain the different types and how they can help a farm business.
  3. The Health Care Power of Attorney and Advance DirectivesMedical and end-of-life plans can ease decision making uncertainties for families.  This bulletin explains the Health Care Power of Attorney, Living Wills, Donor Registries, and Funeral Directives.
  4. Wills and Will-based PlansA will is a commonly known tool for distributing property.  This bulletin explains different types of wills and how they can be used in a farm transition plan.
  5. Legal Tools for Avoiding ProbateWe review legal tools that transfer assets upon death and avoid probate, including beneficiary designations, payable on death accounts, transfer on death designations, and survivorship deeds.
  6. Gifting Assets Prior to DeathGifting is one way to transfer assets to the next generation.  In this bulletin, we discuss how gifting works and when it can be advantageous to incorporate gifting into a transition plan.
  7. Using Trusts in Farm Transition PlanningTrusts are popular tools in farm transition planning.  In this bulletin, we explain how trusts function and highlight how they can meet family and farm planning needs.
  8. Using Business Entities in Farm Transition PlanningMany farms have business entities for liability or tax purposes, but business entities can also enable transition of a business to the next generation.  We explain how in this law bulletin.
  9. Strategies for Treating Heirs EquitablyWhether heirs should inherit assets equally or equitably is a challenging dilemma for parents.  We present strategies for equitable distributions of assets in this bulletin.
  10. Strategies for Transferring Equipment and LivestockEquipment and livestock can be more difficult to transfer than other assets.  In this bulletin, we review special considerations and strategies that can help minimize the challenges of these transfers.

Find the entire set of bulletins on the Farm Office website law library at go.osu.edu/farmplanning.  We also cover these topics in our popular Planning for the Future of Your Farm Workshop, offered online and in person each winter.  The next online workshop will begin January 23, 2023--check our Events Page at farmoffice.osu.edu for workshop registration details.  Reading our new bulletins and attending our workshop are two first steps that can help you plan for the future of your farm.

This resource is provided with generous funding from USDA National Agricultural Library, in partnership with the National Agricultural Law Center.

NAL NALC

 

Young farmer in a field of wheat
By: Peggy Kirk Hall, Tuesday, August 02nd, 2022

The idea to use income tax incentives to help Ohio’s beginning farmers gain access to agricultural assets floated around for several years in the Ohio General Assembly.  The idea became a reality when the Beginning Farmer Bill sponsored by Rep. Susan Manchester (R-Waynesfield) and Rep. Mary Lightbody (D-Westerville) passed the legislature, was signed by Governor DeWine and became effective on July 18, 2022.  The law is now in the hands of the Ohio Department of Agriculture (ODA), charged with implementing its provisions.

The new law sets initial eligibility criteria for certifying “beginning farmers,” directs ODA to establish the certification program, and authorizes two types of income tax credits for certified beginning farmers and those who sell or lease assets to certified beginning farmers.  According to ODA, the income tax credits will be available for 2023, once the certification program is up and running.  The law sunsets the tax credits on January 1, 2028 and also limits the total amount of tax credits that can be awarded to $10 million.

Here’s a summary of what to expect from the new law.

Certification of beginning farmers.  The ODA will establish a process for designating a farmer who meets the eligibility criteria to be a “certified beginning farmer.”  The law sets initial criteria for beginning farmers designation but also allows ODA to create additional requirements.  ODA may seek participation from Ohio State and Central State in the certification of beginning farmers. The initial certification conditions are:

  • Resident of Ohio.
  • Seeking entry to or has entered farming within the last 10 years.
  • Farms or intends to farm on land in Ohio.
  • Is not a partner, member, shareholder, or trustee of the assets the individual is seeking to purchase or rent.
  • Has a total net worth of less than $800,000 in 2021, including spouse and dependent assets, as adjusted for inflation each year.
  • Provides majority of daily physical labor and management of the farm.
  • Has adequate farming experience or knowledge in the type of farming for which seeking assistance.
  • Submits projected earnings statements and demonstrates profit potential.
  • Demonstrates farming will be a significant source of income for the individual.
  • Participates in a financial management program approved by ODA.

Financial management programs for beginning farmers.  ODA must approve financial management programs that meet the certification requirement, in consultation with Ohio State and Central State.  The list of approved programs will be available on ODA’s website.

Income tax credits for certified beginning farmers.  An individual who attains certification as a beginning farmer may apply for a state income tax credit equal to the cost incurred during the calendar year for participating in an ODA approved financial management program or a substantially equivalent financial management program approved by the USDA.  The tax credit is nonrefundable.  If the tax credit exceeds the beginning farmer’s tax liability in the year granted, the excess can carry forward for not more than three succeeding tax years.

Income tax credits for owners who sell or rent assets to certified beginning farmers.  An owner who sells or rents “agricultural assets” to a certified beginning farmer during the calendar year or in either of the two preceding calendar years may apply for a state income tax credit.  The credit will be equal to 3.99% of the sale price or the gross rental income received during the calendar year for either a cash or share rental agreement. “Agricultural assets” includes agricultural land (at least 10 acres and in agricultural production or earning $2500 in average yearly gross income from agricultural production if under 10 acres), livestock, facilities, buildings, and machinery used for agricultural production in Ohio. The owner cannot be an equipment dealer, however, nor can the certified beginning farmer receiving the assets be a partner, member, shareholder, or trustee of the owner of the assets.  Rented assets must be rented at prevailing community rates, as determined by ODA in consultation with the Ohio tax commissioner. The tax credit is nonrefundable but may be carried forward for seven succeeding tax years if it exceeds the owner’s tax liability.

Time to plan.  As we await ODA’s rules and procedures for the new tax credits, beginning and existing farmers can use this time for planning.  Review the new law with your attorney and accountant to determine how the income tax credits could affect you.  If you are a beginning farmer seeking agricultural assets, spend time trying to connect with an existing farmer who is ready to sell or rent agricultural assets.  Although the 3.99% credit for those transfers may not sound significant, run the numbers and see how they could play out.  The hope of the new law is that those numbers will be enough to help a beginning farmer have greater access to those important assets that are critical to farming in Ohio.

Information on House Bill 95, the Beginning Farmer bill, is available at this link

By: Robert Moore, Thursday, July 28th, 2022

Legal Groundwork

As anyone who has been an executor of an estate or has had to deal with an estate knows, the probate process can be slow, cumbersome and expensive.  Fortunately, much probate, and sometimes all probate, can be avoided with some planning and diligence.  The following is a brief discussion on how to avoid probate with different types of assets.

Real Estate

Survivorship Deeds.  Ohio law allows co-owners of real property to pass their share of the property to the surviving co-owner(s) upon death through a survivorship deed, also referred to as a “joint tenancy with survivorship rights.”  This type of deed is common in a marital situation, where the spouses own equal shares in the property and each becomes the sole owner if the other spouse passes away first.  The property deed must contain language such as “joint with rights of survivorship”.

Transfer on Death Affidavit. Another instrument for designating a transfer of real property upon an owner’s death is the “transfer on death designation affidavit.” This affidavit allows property to pass to one or more designated beneficiaries if the owner dies.  The process is simple, it requires the owner to complete an affidavit and file it with the recorder in the county where the land is located.  Upon the owner’s death, the beneficiary records another affidavit with the death certificate and the land is transferred without probate.

Vehicles

Ohio law also allows motor vehicles, boat, campers, and mobile homes to transfer outside of probate with a transfer on death designation made by completing and filing a Transfer on Death Beneficiary Designation form at the county clerk of courts title office.  There is a special rule for automobiles owned by a deceased spouse that did not include a transfer on death designation. Upon the death of a married person who owned at least one automobile at the time of death, the surviving spouse may transfer an unlimited number of automobiles valued up to $65,000 and one boat and one outboard motor by taking a death certificate to the title office.

Payable on Death Accounts

All personal financial accounts, including life insurance, can include payable on death beneficiaries.  The beneficiaries are added by using forms provided by the financial institution.  Upon the death of the owner, the beneficiary completes a death notification form and submits to the financial institution with a death certificate.  The beneficiaries are then provided the funds held by the account.

Business Entities

The many advantages of using business entities are well known but avoiding probate is an often-overlooked attribute of business entities.  Ohio law allows business entity ownership to be transferred outside of probate by making a transfer on death designation.  This is most commonly done with ownership certificates or within the operating agreement.  Upon the death of the owner, the ownership is transferred to the designated beneficiary with a simple transfer business document.  

Non-Titled Assets

Farms have many untitled assets such as machinery, equipment, livestock, crops, and grain.  These assets can be made non-probate, but it will require either a trust or a business entity.  For example, machinery can be transferred to an LLC.  Then, the LLC ownership is made transfer on death to a beneficiary.

Ohio law allows probate to be avoided relatively easily.  Estates worth many millions of dollars can avoid probate and make the administration easy.  However, the owner of the asset must take the time and make the effort to change the title or add a beneficiary.  An attorney familiar with estate planning can assist with making sure all assets are titled to avoid probate.  The executor and the heirs of the estate will appreciate having little or no probate to deal with.

Ohio Farmland Leasing Update webinar
By: Peggy Kirk Hall, Tuesday, July 26th, 2022

Is it time to start thinking about your farmland lease for next year?  We think so!  There are new legal issues and updated economic information to consider for the upcoming crop year.  That’s why we’ve scheduled our next Ohio Farmland Leasing Update for Thursday, August 11 at 8 a.m.  Join the Farm Office team of Barry Ward, Robert Moore and Peggy Hall for an early morning webinar discussion of the latest economic and legal farmland leasing information for Ohio. 

Here are the topics we’ll cover:

  • Ohio’s new statutory termination law for verbal farmland leases
  • Using a Memorandum of Lease and other lease practice tips
  • Economic outlook for Ohio row crops
  • New Ohio cropland values and cash rents survey results
  • Rental market outlook

There’s no cost to attend the Zoom webinar, but registration is necessary.  Visit https://go.osu.edu/farmlandleasingupdate for registration.  And if you’re already thinking about your next farmland lease, also be sure to use our farmland leasing resources on https://farmoffice.osu.edu.    

By: Robert Moore, Thursday, July 21st, 2022

Legal Groundwork

A challenge that many farm families face is how to bring the next generation of farmers into the farming operation.  In addition to the challenges of management, delegation of responsibility and communication, the intensive capital nature of farming presents a unique challenge to many farm families.  That is, how to bring a 25 year-old into a multi-million dollar farming operation?  The next generation farmer may not have the resources to buy into the farming operation.  Also, the current generation may not want to make a large gift to get the next generation into the farming operation.   Using multiple entities can help reduce the challenges of this situation.

Let’s start with a typical farming operation that has all assets under common ownership, either as individuals or an entity.  The value of this entity is the combined value of all the farm assets.  For the next generation farmer to gain ownership in this operation, the total value of the farm assets is used to calculate their buy in or gift.  This scenario is illustrated in the following diagram:

Graphical user interface, text, applicationDescription automatically generated

In this scenario, Mom and Dad own all the farming assets in their names.  The total farming operation is valued at $3.5 million.  For Daughter to even enter the farming operation as a small percentage owner, say 10%, she should either need $350,000 to buy into the operation or Mom and Dad would need to gift her $350,000.  Also, Mom and Dad may be reluctant to give Daughter part ownership of the machinery and land in event Daughter ends up not staying on the farm.

To overcome this difficult situation, the farming operation is divided into three separate entities.  The operating assets are held in an Operating LLC, the machinery in a Machinery LLC and the land in a Land LLC.  By dividing assets among multiple entities, the total value of the farming operation has been divided among the entities.  See the following diagram:

Graphical user interface, text, application, chat or text messageDescription automatically generated

Each entity has a value which is considerably less than the total value of all farm assets.  Now, Mom and Dad can bring Daughter into the Operating LLC as a 10% owner for only $50,000.  Daughter may have $50,000 available for a buy-in or, more likely, Mom and Dad are more comfortable making a $50,000 gift.  Also, it may be possible to get the Operating LLC to a near $0 value by distributing out the cash and grain to Mom and Dad before Daughter enters the operation.

The entity diagram after Daughter becomes an owner in the Operating LLC is as follows:

Graphical user interface, text, application, chat or text messageDescription automatically generated

Daughter has become and owner in the Operating LLC and can help with management and decision making for the farming operation.  However, Mom and Dad retain full ownership and control over the machinery and land.  Perhaps after a few years, when Mom and Dad are more confident Daughter intends to stay on the farm, Daughter begins to buy into the Machinery LLC or is gifted ownership.  Or, perhaps Daughter eventually buys her own machinery for the farming operation.  The same can be done with the land LLC. 

When bringing in the next generation into the farming operation, a multi-entity should be considered.  It is a good method for the next generation farmer to enter the farming operation without the burden of accounting for the value of all farm assets.  It also allows the current generation to maintain ownership and control of the more important farm assets.

 

Person signing a contract
By: Peggy Kirk Hall, Tuesday, July 19th, 2022

Lawsuits over late terminations of farm crop leases might reduce after a new law in Ohio takes effect on July 21, 2022.  The law will affect situations where the parties in a farm crop leasing arrangement have not addressed a date or method for terminating the lease--typically verbal leases, although a written lease might also fail to address termination.  A landlord in those situations who wants to end the crop lease will have to do so by delivering a written notice of termination to the tenant operator by September 1.  A late attempt by the landlord to terminate the lease after September 1 would not be effective and the lease would continue for another crop year, although a tenant operator can choose to agree to accept a landlord's late termination.

Why the new law?

It's been common practice in Ohio for landlords and tenants to enter into a simple farm lease arrangement, usually verbal, that repeats from year-to-year with the only term up for discussion sometimes being the rental amount. Other important leasing details are overlooked, such as when the lease ends and what one party must do to terminate the lease.  The lack of these details is especially problematic when the land changes hands due to a sale or a landlord's death, or if another operator tries to "bid up" the leasing amount.  Without any termination notice provisions, the landlord might try to terminate the leasing arrangement in late Winter or early Spring, after the tenant operator made investments on the belief that the lease would continue for another crop year.   f the operator stands to lose investments and income, litigation is the likely outcome and a court will decide if the landlord attempted to terminate the lease "too late."  We'e seen many cases like this in Ohio.

Ohio's new law aims to reduce farm lease termination conflicts by requiring the landlord to give  advance notice of the intent to terminate the lease.  A termination by the landlord by September 1 should provide the operator with sufficient notice that the lease is not continuing, keeping the operator from making post-harvest and end-of-year investments for the next crop year.  This is a common law in other states, and Ohio is one of the last states in the Midwest to enact this type of "statutory termination date" for farm leases.

New law highlights the importance of a written farm lease

We always encourage parties to put their farm lease agreement in writing.  A written farm lease can detail important terms such as termination, preventing uncertainty in the future.  A written lease also complies with Ohio's Statute of Frauds. That law requires a farm lease to be in writing, meaning that verbal leases aren't automatically enforceable in a court of law.  Due to the Statute of Frauds requirement, parties to a verbal farm lease must convince the court that their lease deserves an "exception" from the law and if the exception is granted, would have to prove the terms of their verbal agreement.  Verbal leases are always at risk of non-enforcement and disagreement over the terms of the lease.

Using a written lease, the parties may agree to their own termination procedures and dates and the statutory termination law would not apply to their leasing arrangement.  The law is simply a default for those crop leasing situations that do not address termination.

Details of the new law

We've developed several questions and answers that help explain the new law, available here and in our newest Law Bulletin, Ohio’s New Statutory Termination Date for Farm Crop Leases, available on farmoffice.osu.edu.

What farm leases are subject to the new law?
The law applies to both written and verbal “agricultural lease agreements” that address the planting, growing, and harvesting of agricultural crops. The law does not apply to leases for pasture, timber, farm buildings, horticultural buildings, or equipment.

What if a lease already addresses termination?
The new law only applies when a leasing arrangement has not provided for a termination date or a method for giving notice of termination. If the landlord and tenant operator have addressed these provisions in their leasing situation, the provisions are unchanged by the law and continue to be effective.

When is the termination effective?
If a landlord gives notice of termination in writing by September 1, the law states that the lease is terminated either upon the date harvest is complete or December 31, whichever is earlier. However, the law allows the parties to establish a different termination date if agreed to in writing.

How must a landlord give notice of termination?
The landlord must give the notice in writing and deliver it to the tenant operator by hand, mail, facsimile, or email by September 1. The law does not require using specific language for the notice, but we recommend including the date of the notice, an identification of the lease property, and a statement that the lease will terminate at the end of harvest or December 31, 20____ unless the parties agree in writing to a different date.

What if a landlord terminates after September 1?
Unless the leasing arrangement provides otherwise, a termination delivered by the landlord after September is not effective and the lease would continue for another period. However, the tenant operator could agree to accept the late termination. If so, the parties should both sign a termination date agreement.

Can a tenant terminate a lease after September 1?
A tenant operator is not subject to the new law and can terminate a lease after September 1 unless the leasing arrangement provides otherwise.

Help with farm leases

Our farmland leasing library contains several resources about the legal aspects of farm leases.  We also address the economic side of farmland leasing with data on cash rents and farmland values, custom rates and machinery costs, and enterprise budgets.  If you need assistance finding an agricultural attorney who works with farm leases, we can help with that too; contact us by email at aglaw@osu.edu.  We'll do our best to help you reduce the uncertainty and risk of your farm leasing arrangement.

 

 

By: Barry Ward, Monday, July 18th, 2022

Barry Ward, F. John Barker, Eric Richer - Ohio State University Extension

Farming is a complex business and many Ohio farmers utilize outside assistance for specific farm-related work. This option is appealing for tasks requiring specialized equipment or technical expertise. Often, having someone else with specialized tools perform tasks is more cost effective and saves time. Farm work completed by others is often referred to as “custom farm work” or more simply, “custom work”. A “custom rate” is the amount agreed upon by both parties to be paid by the custom work customer to the custom work provider.

Ohio Farm Custom Rates

The “Ohio Farm Custom Rates 2022” publication reports custom rates based on a statewide survey of 223 farmers, custom operators, farm managers, and landowners conducted in 2022. These rates, except where noted, include the implement and tractor if required, all variable machinery costs such as fuel, oil, lube, twine, etc., and labor for the operation.

Some custom rates published in this study vary widely, possibly influenced by:

  • Type or size of equipment used (e.g. 20-shank chisel plow versus a 9-shank)
  • Size and shape of fields,
  • Condition of the crop (for harvesting operations)
  • Skill level of labor
  • Amount of labor needed in relation to the equipment capabilities
  • Cost margin differences for full-time custom operators compared to farmers supplementing current income

Some custom rates reflect discounted rates as the parties involved have family or community relationships, Discounted rates may also occur when the custom work provider is attempting to strengthen a relationship to help secure the custom farmed land in a future purchase, cash rental or other rental agreement. Some providers charge differently because they are simply attempting to spread their fixed costs over more acreage to decrease fixed costs per acre and are willing to forgo complete cost recovery.

New this year, the number of responses for each operation has been added to the data presented. In cases where there were too few responses to statistically analyze, summary statistics are not presented. 

Charges may be added if the custom provider considers a job abnormal such as distance from the operator’s base location, difficulty of terrain, amount of product or labor involved with the operation, or other special requirements of the custom work customer.

The data from this survey are intended to show a representative farming industry cost for specified machines and operations in Ohio. As a custom farm work provider, the average rates reported in this publication may not cover your total costs for performing the custom service. As a customer, you may not be able to hire a custom service for the average rate published in this factsheet.

It is recommended that you calculate your own costs carefully before determining the custom rate to charge or pay. It may be helpful to compare the custom rates reported in this fact sheet with machinery costs calculated by economic engineering models available online. The following resources are available to help you calculate and consider the total costs of performing a given machinery operation.

Farm Machinery Cost Estimates, available by searching University of Minnesota.

Illinois Farm Management Handbook, available by searching University of Illinois farmdoc.

Estimating Farm Machinery Costs, available by searching Iowa State University agriculture decision maker and machinery management.

Fuel price changes may cause some uncertainty in setting a custom rate. Significant volatility in diesel price over the last several months has caused some concern for custom rate providers that seek to cover all or most of the costs associated with custom farm operations. The approximate price of diesel fuel during the survey period ranged from $4.50 - $5.25 per gallon for off-road (farm) usage. As a custom farm work provider, if you feel that your rate doesn’t capture your full costs due to fuel price increases you might consider a custom rate increase or fuel surcharge based on the increase in fuel costs.

For example, let’s assume the rate you planned to charge for a chisel plow operation was based on $4.50 per gallon diesel costs and the current on-farm diesel price is $5.50 per gallon. This is a $1 per gallon increase. The chisel plow operation uses 1.15 gallons of fuel per acre so the added fuel surcharge could be set at $1.15 per acre (1.15 gallons x $1 gallon).

 The complete “Ohio Farm Custom Rates 2022” publication is available at: https://farmoffice.osu.edu/farm-management/custom-rates-and-machinery-costs

 

 

 

 

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By: Robert Moore, Thursday, July 14th, 2022

Legal Groundwork

 

As discussed in prior posts, Long Term Care (LTC) costs are a financial threat to many farms.  On average, each person can expect to spend around $100,000 on LTC during their lifetime.  Some people will be lucky and never spend one dollar on LTC while others will require many years of expensive nursing home care.  This great difference in potential LTC needs and costs are one of the reasons LTC planning is so difficult.  We can never be sure what the actual LTC costs will be.

The best we can do is assess the risk to each farm on a case-by-case basis.  The assessment asks: What is each farm’s ability to absorb the average LTC costs and absorb an outlier scenario of several years in a nursing home?  When we know what the actual risk is to that specific farm, we can make better informed decisions as to the best LTC management strategy to implement.

The risk analysis looks at the potential costs of LTC and the ability of the farm to pay for those costs.  Paying LTC costs is a function of available income and assets that can be liquidated to pay for LTC costs not covered by income.  Generally, the assumption is that farmers will first use savings to pay LTC costs not covered by income, then non-real estate farm assets and then lastly real estate.  That is, the land is the last asset that a farmer will typically spend to pay for LTC costs.

To start the assessment, a realistic forecast should be made regarding available income.  It is important to keep in mind that if someone is receiving LTC, there is a good chance they will not be able to operate a farm.  So, income should probably be based more on potential retirement income than income from an operating farm or wages.  All available sources of income should be included such as retirement accounts, investments, land rents, and the sale of operating assets. The income forecast needs to be based on after-tax income. 

The income forecast is then compared to potential LTC costs.  The easiest, and most conservative comparison is between income and nursing home costs.  The most expensive type of LTC is a nursing home, so using nursing home costs is a worst-case scenario.  The first question becomes: is income adequate to cover potential LTC costs?

If there is adequate income to pay for LTC costs, other assets are not at risk.  Additionally, no further LTC planning likely needs done.  Assets are only at risk to LTC when income is inadequate to cover the costs.

For many farms, income alone will not pay for LTC costs.  In these situations, the next step is to determine how long savings will cover the deficiency.  By dividing the available savings by the income deficiency, we can determine how many years of LTC will be covered by savings.  If the savings will cover average LTC costs and outlier scenarios, then all remaining assets are likely protected.

Consider the following example.  Joe is unmarried and a farmer.  He forecasts his retirement income to be $50,000 after taxes.  He has $500,000 in savings and investments, $500,000 in machinery and equipment and $2,000,0000 in land.  He assumes that a nursing home will cost $100,000/year.  His income is $50,000 short of covering the nursing home bill.  He will need to use his savings to cover the deficiency.  He can pay for ten years of nursing home costs before his savings is depleted.

The average male will require about 2.2 years of LTC.  Joe can pay for almost five times the average stay by using income and savings.  Joe’s risk analysis shows that if he is willing to use his savings, his farm assets are at low risk of being consumed for LTC costs.  It is unlikely that Joe will need more than ten years of LTC.

Many farms do not have much savings or investments as all the money goes back into the farm.  In these situations, operating assets may need to be liquidated to pay for LTC.  Like the income forecast, available operating assets should be valued as after-tax.

Consider the same example as above but Joe only has $50,000 in savings.  In this scenario, his savings will only pay for one year of LTC.  After that, he would need to sell machinery to help pay for his care.  The machinery will pay for ten years of care.  In this risk analysis, Joe’s savings and machinery are at risk to LTC costs.  However, his land is likely safe unless Joe requires more than ten years of nursing home care, which is unlikely. 

In this situation, Joe may decide that he is not willing to risk his machinery and transfers it to an irrevocable trust or implements some other strategy to protect it from LTC costs.  If he protects his machinery, he will also need to do the same for his land.

If income, savings and operating assets are insufficient to cover LTC costs, then land is at risk.  As stated above, this is almost always the asset most important to farmers and the asset requiring the most protection.  If the risk analysis shows that the land is likely at risk to LTC costs, farmers will often take action to protect the land.  Protecting the land may include gifting to heirs or transferring to an irrevocable trust.

Using the same example again, except Joe quit farming several years ago and does not own any machinery.  Using his savings, he can only pay for one year of LTC before his land is at risk.  Joe decides to gift his land to his children to avoid having to spend it down for LTC.  Joe decided upon an aggressive LTC plan due to his land being exposed to significant risk from LTC.

It should be noted that gifting assets or transferring assets to an irrevocable trust has many LTC implications and tax implications.  For example, gifting away assets can cause Medicaid ineligibility for up to five years and can have negative tax implications for heirs.  Considerable thought and analysis should be undertaken before gifting assets or transferring to an irrevocable trust.  Remember that there are disadvantages to gifting assets or transferring to an irrevocable trust.

The examples above use a relatively simple scenario using a single person to explain the concept of risk assessment.  For married couples, the assessment is more complicated because we now have the possibility of two people having LTC costs.  Additionally, not all income can be allocated to LTC if one spouse remains at home with continuing living needs.  

As the above discussion shows, until a risk assessment is performed, it is difficult to know what strategy to implement.  When income and/or savings is adequate to cover many years of LTC, there may not be a need for aggressive LTC planning.  If income and savings will only cover LTC for a short period of time, aggressive planning may be needed to protect assets.

An attorney familiar with LTC issues can be helpful with the risk assessment.  Before transferring assets or implementing the plan, an attorney should be consulted.  LTC planning can be complicated and technical.  Implementing the wrong plan can make things even worse.  A small investment in legal fees is worthwhile to be sure your LTC plan is the correct plan for your farm.

Posted In: Estate and Transition Planning
Tags: Long Term Care
Comments: 0
A farm valley and cattle in central Norway.
By: Peggy Kirk Hall, Tuesday, July 12th, 2022

I had the good fortune recently to attend the International Farm Management Congress in Copenhagen, Denmark, along with the pre-conference tour of farms through Norway and Sweden. It was not only a beautiful trip, but an opportunity to view farming practices and legal issues in other parts of the world.  Some practices and issues were surprisingly familiar while others were quite different.  As I visited farms and interacted with farm operators and agricultural business owners, I developed a list of observations about the similarities and differences.  Here are a few of those observations.

  • Farmland should stay in the family.  Very old “allodial” and “concession” laws in Norway and Sweden prevent agricultural property from being sold outside the family or divided into smaller parcels and grant the eldest heir the right to inherit the property. It works.  We visited several farms that had been in the same family for 12 to 14 generations.
  • Environmental compliance and sustainability goals present both challenges and opportunities.  Norway, Denmark, and Sweden have aggressive goals to reduce carbon emissions.  While some businesses noted the challenges of complying with air and water regulations, they were committed to change because consumers want “more sustainable” products and experiences.
  • Agritourism includes sleepovers.  We visited several farms that capitalize on people’s desires to be on a farm, but they also include opportunities to stay over in a hotel or “caravan park” (campground) on the farm, and several also offer spa experiences.  The “farm stay” concept that is so common in Scandinavia is just now beginning to spread across the U.S.
  • Animal welfare laws concern livestock operators.  As we see here in the U.S., new regulations on livestock housing have affected the bottom line of operators forced to make housing changes.  Several operators noted the financial challenges of complying with new requirements, with some choosing not to continue under the new laws.
  • Cooperative models are thriving.  We visited a cooperative for fruit and vegetable producers in a mountain region of Norway, a sheep farm that developed a slaughterhouse to manage processing for other local livestock operators, and a start-up processing facility for pea and legume growers in Sweden, all using cooperative business structures similar to ours here in the U.S.

While some of the issues vary in Scandinavia, the attachment to farming is not all that different.  One of my favorite quotes from the trip illustrates the similarity.  The father in a father-son operation stated to us: “We are proudly farming, growing wheat and potatoes and having chickens.”  Proudly farming—a practice shared by U.S. and Scandinavia farmers alike, in the midst of varying legal issues and opportunities.

Learn more about the International Farm Management Association at   https://www.ifma.network/.  The next IFMA Congress takes place in 2024 in Saskatchewan, Canada. 

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