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Where there's a will . . .

Agriculture.com Staff 08/07/2007 @ 2:31pm

Mary and Dan Meinhart, Montrose, Illinois, never doubted that their younger son, Tony, would be a farmer.

"When he was little, he'd get up early, go outside, and come back in, saying he'd done chores," Mary says.

Twenty-five years later, the Meinharts are incorporating a succession plan into their estate plan. "We're just starting the process and exploring ideas that would work and what wouldn't work," she says.

Their first goal is ensuring that the four-generation farm will remain a viable operation. Second, they want an equitable plan for their off-farm children, Kathy, Sharon, and Carl.

Many farm families share these goals, says Philip Harris, right, University of Wisconsin ag law specialist. "An estate plan is key to accomplishing both family and business goals."

Finding an attorney is a key step. "Get suggestions from your friends, neighbors, or bankers," Harris says. "It's worth the drive for an attorney with ag expertise. After an initial meeting, a lot can be done by e-mail and fax, and finalized face-to-face."

Cost depends upon complexity. "In Wisconsin, a basic estate plan costs $1,500 to $2,000," Harris says. "An LLC could add $1,500. Hourly rates range from $150 to $400. A tailor-made plan costs much more. Families need to weigh the costs."

The Meinharts decided to shop around. "We were quoted $1,200 to $9,000," Mary says. "The high-end quote also included an annual fee of over $300 to update the plan."

Succession planning is challenging because farms are asset-rich and cash-tight. "Both generations need to look realistically at cash flow," Harris says.

"Gifting [up to $12,000 per person per year] reduces parents' retirement income and savings. The kids also need a workable plan."

At the same time, off-farm heirs need to be informed. "They want to know how things will be done and if parents will be cared for," says Joy Kirkpatrick, outreach specialist, University of Wisconsin. "Our surveys show farmers with successors know equal isn't fair."

Harris agrees, "Family members have a lot at stake, and it's scary to talk about it. But it's scarier not to talk. Communication is key."

A limited liability company (LLC) is an increasingly popular farm business and estate planning option.

An LLC is an entity formed under state law that provides limited liability for its owners (members), similar to the limited liability provided to shareholders of a corporation. However, an LLC can be taxed like a partnership, which avoids the double taxation of income under corporate tax rules.

"It can be the best of two worlds," says Joy Kirkpatrick, University of Wisconsin outreach specialist. "It helps the older generation retain control while allowing transfer of assets. Instead of parcels of land, LLC units can be passed to children in a systematic way."

Families place all or part of the operating business assets in the LLC. LLCs allow parents to leverage the available annual gift tax exemptions and use of the available unified credit with discounted membership interests transferred to children. (Gifting will reduce the parents' retirement income and savings.) Assets are insulated from creditors and protected against divorce.

Farmers with an LLC are not treated as employees of the LLC and, therefore, cannot receive some of the tax-free fringe benefits that shareholder/employees of a corporation can receive, such as health insurance. An LLC owner active in the business also must pay self-employment taxes.

Payment limitations for government farm payments may be affected by forming an LLC.

Mary and Dan Meinhart, Montrose, Illinois, never doubted that their younger son, Tony, would be a farmer.

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