How to protect your farm and save money
In a presentation entitled “Protect Your Farm and Save Money,” four lawyers from the Davis Brown Law Firm in Des Moines, Iowa, told attendees at the Land Expo 2020 that farmland owners should develop a good plan to pass the farm on to the next generation. In the opening presentation, Margaret Van Houten outlined some of the provisions of the SECURE Act, which took effect on January 1.
The legislation, which stands for “Setting Every Community Up for Retirement Enhancement,” was part of a government spending bill and enacts a number of numerous provisions that will probably stand as law for a number of years because of its bipartisan support, Van Houten said.
The SECURE Act overlays some old retirement rules with new ones. “It’s very complicated,” Van Houten said of the new legislation, “but there are a lot of benefits.”
Minimum distribution age now 72
For example, the rules concerning required minimum distributions (RMDs) from the SECURE Act changed the age when the distributions must be taken from tax-deferred retirement accounts from 70½ years of age to 72. Other changes include the beneficiary rules for individual retirement accounts.
Because the SECURE Act has only recently gone into effect, other changes are still being examined. “We are going to be learning a lot over the next few years,” Van Houten noted.
Also presented was a case study involving a fictitious farm family with farmland in Iowa, Missouri, and Nebraska. The case was intended to illustrate how the family planned to pass the farm on to succeeding generations and, hopefully, save some money, said Davis Brown lawyer Bill Hanigan, who acted as a moderator for the legal presentation.
Update your estate Plans
Davis Brown lawyer Tom Houser advised that families need to update their estate plans if the plans were written before 2013 because the legal rules and regulations affecting estate plans have changed since then.
The probate process has its advantages and disadvantages, he noted. Probate is a great way to resolve disputes when conflicts arise within a family. However, many families don’t have this level of conflict. Probate matters are compounded when the family owns land in different states, which may have conflicting provisions in their respective probate laws. The estate planning process needs to be streamlined, Houser said, in order to minimize administrative expenses and to ensure that family members who are inheritors are treated equally among different state statutes regarding property in the estate. Creating a revocable trust can help streamline the administrative process and reduce overall costs, he added.
Another way to streamline an estate plan of a farm family is to create a limited liability company (LLC), according to Breanna Young of the Davis Brown firm. An LLC also limits the farm’s liability in case an accident occurs on the property by creating an extra layer of protection.
For tax purposes, there are different classes of LLCs, she remarked. A single-member LLC may be considered the same as a sole proprietorship by the Internal Revenue Service. For a multi-member LLC, the IRS may consider that as a partnership, a “C” corporation, or an “S” corporation.
The LLC separates ownership of the property from the managers of that property, Young added, which enables the parents to maintain their management of the farm while they are still alive.
Because the LLC is legally considered the sole owner of the farm, its value may be higher than if there were multiple owners dividing the farm’s value, she said.
In case some of the members of the LLC want to put the farm up for sale, the LLC can grant the right of first refusal to family members in the LLC who don’t want to sell, Young stated. The value of the farm can be set by mutual agreement between the LLC members or, if they can’t agree on a value, it can be based on a neutral, third-party appraisal conducted by a professional appraiser or real estate agent.
Give portion of farm annually
Van Houten said that the gift law allows farmland owners to give a certain portion of the farm to each of their succeeding family members annually, thus lowering the monetary tax consequences of the federal estate tax when the parents die. In this age of very high estate tax exemptions, she noted, it is more important than ever to consider the income tax “basis,” or assumed cost of the property at the time of the lifetime gift. Although a gift can end up saving no estate tax, it can cause a capital gains tax when it is sold by the beneficiary, she concluded.