Farmers Urged to Be Proactive in Succession Planning
DES MOINES, Iowa (Agriculture.com)—The snowstorm isn’t all that farmers are talking about at this week’s Iowa Power Farming Show. Off the exhibitor floor, how to successfully transition farm ownership to the next generation is being heavily discussed.
Financial experts fear that due to the low commodity price environment, farmers will decide to dial back and wait to set up farm transition issues proactively.
“Farmers tend to take care of what is urgent first, what’s important second,” says Mark McLaughlin, representative with Farm Financial Strategies, Inc.
“Because you never know when you or your parent’s time is up on this earth, we encourage farmers to get a will and a plan. It should be seen as being urgent and important.”
Following his presentation on farm continuation, McLaughlin was bombarded with multiple farm-family transition scenarios.
One farmer shared that his own siblings (on-farm heirs), purchased the family farm for way below market price, put the parents in a nursing home, sold the farmhouse, and left the off-farm heirs “out in the cold”, due to an irrevocable will.
Yet another farmer in attendance shared that he would like to set up a transition of farm ownership to his son. However, the son has filed Chapter 11 bankruptcy.
And the third scenario involved an on-farm heir that was concerned how to pay inheritance taxes if he and his sisters’ parents died. And there were more.
Needless to say, farmers walking the convention center, here, looking at power equipment, are also thinking about heavier issues such as farm transition.
There are three popular means to transfer farm operations, McLaughlin says.
A will that is categorized as a simple or planning will is often chosen. Simple, meaning that the late husband’s assets go to the wife and then to the kids, once the wife dies. The key is that families have to capture the $5.4 million federal estate tax portability (avoiding tool) from the first death to the second death. If this tax form is not filed, the portability is lost.
A planning will is the second most popular means to transfer ownership, McLaughlin says. This can be set up in different ways. However, a testamentary trust can be used in this scenario that allows the farm income to be used, while the principle value of the farm is protected for the kids.
Thirdly, a revocable will can be used to avoid probate costs, it replaces a traditional will, and avoids public records. Under this scenario, the transfer of assets are kept private.
“The important message here is that owners should consider how they want the transition of the farm to occur, in the event they are no longer able to make those decisions,” McLaughlin says.
For example, who gets to rent the farm ground? And, what terms do they get to rent the farm?
“I’ve seen many times where the farming heir gets challenged by siblings about what rent rate that they are paying. It creates a conflict of interest at best and division at worst.”