Transferring machinery and livestock

Most retiring farmers are faced with how to pass down assets such as livestock and machinery to their children. Every situation is different and needs to be carefully worked out to benefit both parties.

David Bau is an extension educator in agricultural business management at the University of Minnesota. He says one option is to gift a portion of the machine over a period of time. For example, let’s say you have a $150,000 tractor. For each of the next ten years, your child is gifted one-tenth of its value. After ten years, the child will own the tractor.

If you can’t afford to gift things away, Bau says to draw up a lease agreement with each lease payment credited toward the principal.

"So, in other words if I’m going to have to pay $5,000 a year for the next 10 years to rent that equipment, well that’s really $5,000 that’s going to go toward my principal payment. You can’t say that in a contract legally, but you can have a buyout clause, you can just have that agreement between parents and kids that says I’m going to at the end of the lease time sell you this tractor, combine, or bobcat, for this value," explains Bau. "That works, and that gives the parents some income stream as they’re retired, and the sons and daughters are moving into the operation."

With livestock, he says breeding animals and regular livestock have different rules.

"Most of the time when you sell your livestock to your kids, it’s going to be ordinary income right up front. You do have some people who buy livestock and then have depreciation on that livestock, but if they raise the livestock and became part of their breeding herd, there is no basis in that to really worry about," he says. "And they can do the same thing I just talked about with equipment, they can choose to gift it to their kids."

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