July 11, 2022 at 2:58 p.m.

Transition, estate planning

By Tom Anderson- | Comments: 0 | Leave a comment

In my June article, I concluded by asking how we separate business and family; how we set priorities of business profits versus a value system and family life.
Generational differences will always be a challenge and hopefully a blessing, especially as we begin to transition our farming operation to the next generation. I have had the privilege of working with farm families and their transitions for more than two decades. During that time, I learned this needs to be a team event with team members including outside, non-biased resources. These might be your farm management instructor, banker, tax accountant and lawyer or other trusted individuals you can use to bounce around ideas.
First, transition and estate planning are not the same. In a transition plan, we need to look at transitioning some business assets but also the business management – a skill set, decision-making abilities and a whole new level of responsibility. Being a son or daughter or employee is a whole different ballgame from managing and owning the business. The next generation is always eager to own more, get paid more and feel like they are in charge until one day when stuff hits the fan and they need to show up, because now they are in charge.
Remember, transition is a process and not an event. If at all possible, allow 10-plus years to transition a business. Often in transitioning a dairy, for example, an entity is created – perhaps a limited liability company. This is used to transfer a percentage of the business (shares) to the next generation. The shares can be sold or gifted to the next generation, as management and workload are being transferred. Selling of shares is a taxable event for the owner, but in the case of feed or raised cattle, the tax is due when the seller receives payment. So, a 3 to 5-year contract agreement is a likely choice. The downside, perhaps, is that the percentage of the sale that is for purchased capital (equipment or cattle) is taxable in the year of the event/gift regardless of the repayment plan. Depending on the size of the sale, this may cause a shortage of cash. Tax law does not allow us to sell selected parts of the LLC; it is a percentage of all the assets. As a result, gifting is often a great method to use and then rent the land to provide funds for the older generation’s needs.
Estate planning is a part of the transition planning process but generally is the plan of how to distribute assets upon passing, often times including the real estate ownership. Beneficiaries will receive a stepped-up basis on capital assets upon passing (cattle, machinery and land), which may eliminate a lot of capital gains/recapture tax that would have been incurred if sold before passing. In terms of the real estate, I suggest the younger generation realize the difference between control versus ownership. A growing dairy may need the control more than the ownership. If the second generation will receive land upon the older generation’s passing (allowing for control now and in the future), then let’s worry more about acquiring other land to grow the business and not tie up cash flow for what will be theirs in the future.
I would encourage the older generation to consider and reconsider what the plan means to the next generation.
Is group ownership in land is a good thing? Will the plan allow the next farming generation to cash flow? Will the non-farming heirs get paid big dollars while the farming heirs have to pay for land they have been renting for the past 30+ years? Is there a difference between fair and equal? Perhaps the older generation could consider what the land was worth when the last child left the nest?
This may help determine the value of inheritance for the non-farming heirs while allowing those who have been farming to get credit for their years of work.
If there is a generation with no farming heir, or heirs that don’t want to farm in the future, I think some thoughts could be considered.
Selling a home generally is a tax-free event. Selling the homestead while maintaining the right to live there may have little tax implications but allow the seller to take some cash out of the estate. Consider a sale agreement with a young producer for a purchase upon the owner’s passing. The sale agreement can set a sale price or a method to determine the price at the time of passing. This is a great tool allowing the older generation the opportunity to make decisions on their estate and reduce disagreements by the heirs, while allowing the heirs to get a stepped-up basis and eliminating the capital gains tax – essentially getting the heirs more money in the end.
I suggest planning succession to the next generation and not leaving it to chance. Farmers should surround themselves with trusted, knowledgeable individuals who are not stakeholders in the operation and have their best interest in mind. A few dollars today have the potential to save a lot in the future while allowing farmers to make the choices they want for their estate.
    Tom Anderson is a Farm Business Management faculty member at Riverland Community College.


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