Don’t Let Higher Estate Tax Exemptions Make You Complacent About Transition Planning
BLAIR, Neb. (DTN) — Nebraska farmer Tim Andersen lost both of his parents last year. He operates the family farm near Blair, and while he’s struggling to make a profit on corn and soybeans this year, he’s also trying to find a way to settle the estate that satisfies his off-farm siblings.
“Every farm operator wants to keep the farm together going forward,” said Andersen, who raises corn and soybeans on about 2,000 acres with his son, Jarett, and runs a commercial trucking business on the side. “That’s why we work so hard. But it’s tough if, every generation, you have to buy out the off-farm heirs. We farm land that’s been in our family 124 years. We would like to buy more outside land to expand, but we can’t because we have to buy our family land back.”
Even when families mostly get along, managing a transition is difficult. Family farm advisers worry recent changes to the tax code — particularly the doubling of the federal estate tax exemption to $11.2 million per individual or $22.4 million per couple — could take the pressure off farm families to plan their farm’s transition to the next generation.
“There are a lot of nontax reasons to continue to plan and manage transitioning the farm,” said Joseph Duda, CPA and agribusiness industry professional with CliftonLarsonAllen in Rochester, Minnesota. Like in Andersen’s case, it’s especially important if you have more than one child.
Duda said working with a professional adviser, who is not just selling life insurance, can go a long way to bringing clarity to the transition.
On the surface, it seems simple. Mom and dad had an estate plan, put their assets in a business entity and gifted shares to their adult children. They have a buy-sell agreement, so they think the farm should pass seamlessly to the next generation. The on-farm heir should be able to keep the operation together to pass on to his children who will continue the family farm.
It’s rarely that simple.
PREPARATION CAN SPEED UP THE PROCESS
Andersen’s dad died in January 2017, followed by his mom five months later. The family is still working through the process of dividing the estate more than a year later. Just finding all the documents and putting together the paperwork for all the cash, grain, equipment, land, stocks, bonds and working with the lawyer took months.
“The biggest surprise was how slow the process is to settle an estate,” said Andersen.
If you want to do your heirs a favor, family farm advisers suggest having a file with all the account numbers and contact persons with phone numbers for each of your brokerage, bank, insurance and elevator accounts as well as the location of deeds, if you keep them in a safe deposit box, or a copy of your deeds. It’s important to update this yearly. You may not have annual changes, but when changes occur, they might go unrecorded in the file if you don’t update regularly.
SET BUY-SELL AGREEMENT GOALS
Buying out off-farm heirs has gotten tougher as farmland values have skyrocketed over the past 20 years.
“In the 1980s, when land was $2,000 an acre, you could afford life insurance to buy out the off-farm heirs,” Andersen said. “Today, however, farm operations can’t afford the premiums to buy enough life insurance for the equivalent land value for the off-farm heirs.”
Duda said it’s difficult to transition a farm in one year. It’s important to have a plan that the operation can handle and update it as conditions change.
“Equal is not always fair,” he said.
There should be a way to recognize the contributions of the on-farm heir for the extra work he or she puts into improving and growing the operation and for the care and attention he provides his retired parents, Andersen said.
“My wife and I and our children worked with Dad for 40-plus years to improve the land and farm operation. But with all the improvements we made to the farm, taking out the trees and fences, re-terracing and tiling the land, it doesn’t quite seem fair that I only keep one-fourth of the increased value.” The three off-farm heirs get 75% of the increased value attributed to Andersen’s improvements.
To counter that, some buy-sell agreements lock the value of the land in at the year the on-farm heir came back to farm. The parents reason that, up to that point, all their children should benefit from what the parents did to build the farm. But once the on-farm children come back full time, their contribution improves the value, and they take the brunt of the inflation/deflation risk from then on.
Other buy-sell agreements use fair market value at the death of the parents but give the on-farm heir 10 to 15 years to pay it back. If off-farm heirs want their cash earlier, the value of their portion is reduced by 20%.
There’s also a big difference between cash and valuing farmland in your operation, said Andersen. “What’s a million dollars of farmland worth compared to cash if it’s not liquid and there is no guarantee of an annual return, like this year?”
EXPERT ADVICE IS KEY
Incorporating expert advice in the planning process is critical to ensuring the plan will do what you intend.
“Every parent assumes their children will get along when their gone,” said Andersen. “But money changes people. You have to assume there will be a problem.”
Not all local attorneys are well versed in agricultural estate planning, but your banker or accountant could have good recommendations. Your land-grant college’s agriculture economist who specializes in taxes or transition planning may also be able to recommend a good adviser in your state. You may have to go outside your area to find the right estate-planning expert for your farm.
“Sometimes, lawyers find a way to interpret a line in your will or buy-sell agreement that is ‘open to interpretation’ that is not what was intended when it was set up,” Andersen said. “For my estate plan, I want it to be as simple as I can get it, keep the farm together for future generations to farm and to do what my wife and I intend, not picked apart and changed by lawyers.”
Duda said estate planning is easy to put off because most people want to avoid talking about death, but having a formal plan for transition in the case of death, divorce, disability or disagreements is extremely helpful.
Andersen said having a plan for the next generation is imperative to the next generation’s success.
“The proudest moment in a father’s life is when one of his children says he wants to join the operation and continue what he and his ancestors have built,” said Andersen.