Planning to transition the family farm starts years before you’re ready to retire. As with farming itself, you want to ensure you have everything in place to support a good season and reap a bountiful harvest.
In transition planning, this means lining up your financial statements, making determinations about the viability of the farm under the new ownership and ensuring the viability of your own retirement plan. You should also consider who you’re transitioning the farm to and how and make timely adjustments, sales and gifts to support your goals.
If you start early and work with professionals who understand the agricultural industry, you’ll be better able to attain your goals for the transition and your retirement. These professionals can guide you on the timing, measures and methods that will optimize your outcomes. They’ll make it seamless, helping you avoid risks and reap all of the benefits.
Here, we’ll lay out the three essential components of transitioning the family farm, including pertinent details and options to consider along the way.
1. Plant: Ensure You Have the Right Financial Resources
Your financials are the seeds with which you begin planning your transition process. With an accurate view of where you stand today, you can make determinations about how you’ll use key ratios in your financials to enhance profitability ahead of the transition and ensure viability. That way, you’ll enter lender meetings with confidence, ready to discuss next steps.
An Agribusiness Finance Specialist (AFS) can help you get organized and understand the best approach to financial restructuring for optimal profitability.
Other key aspects of this component of the transition include:
At Eide Bailly, we help clients put together detailed, accurate financials. In our financial analysis packets, we include industry standards as a reference point to help clients educate themselves on ratios, how they’re calculated and how their operations stack up.
Our packet includes but is not limited to:
A clear perspective on finances is critical for successful agricultural operations and transitions.
Watch our webinar recording on Agribusiness Finance Solutions.
*A note on accrual adjusted income statements:
We recommend using accrual adjusted income statements. The cash basis income statement only recognizes the income and expenses when they are receipted or paid for. Accruals account for changes from the beginning balance sheet to the ending balance sheet, with adjustments based on what actually happened. This way, you see true operations performance and get accurate, consistently dated market value balance sheets.
2. Cultivate: Optimize Your Family Farm Estate Plan
Estate and wealth planning are your means to nurture your goals for the transition. This planning clarifies the nuts and bolts of which specific options will optimize your financial outcomes and support your objectives as you approach that transition.
It’s best to work with a Wealth Transition Advisor who can help you make the most of your farm estate planning strategies. Our experienced Ag Producer advisors take a holistic approach to estate planning. Our goals are to:
Essential considerations around family farm estate planning include:
The Current Estate Planning Environment
Currently, the Federal Gift Estate Tax Exemption for 2021 is $11.7 million at an estate and gift tax rate of 40%. It’s available for Gift, Estate and Generation Skipping Tax (GST). The 2021 Annual Exclusion is $15,000 per person. The IRS will not claw back the difference, or bonus amount, between that higher exemption of $11.7 million and the $6 million in 2026.
Because of the coronavirus pandemic, our planning world is much different than what we’ve had in the past. The current environment involves:
With all of this in play, now is the time to plan and work with your advisors. Ensure your documents provide for portability and flexibility with a change in the exemption. If you intend to use the higher exemption, consider setting yourself up to act if it looks like something will change. You might set up a trust for transferring assets or be prepared to break out and gift real estate holdings.
Portability can make planning more complex, but it may be the right move for you and it’s worth considering. With it, if you don’t use your exemption on your death, your personal representative could file an estate tax return and elect to make your exemption portable to the surviving spouse.
Many mid-size estate plans may now be out of date. If your current planning technique is Credit Trust/Marital Trust or Family Trust/Marital Trust, consider a more flexible option that gives beneficiaries a chance to have a second step-up, like a Disclaimer Trust or Qualified Terminable Interest Property Trust (QTIP).
As you plan, don’t neglect to run the numbers. We use a simple flow chart that factors for total assets, tax on the first death, how it passes on the first death and what the tax is on the second.
Charitable planning has many advantages for farmers, and there are several options available:
Life insurance is an invaluable element of a well-rounded estate plan. You can use it for liquidity to pay estate taxes or debts, for the purchase of the farm property by the farming children, or for distribution to off-farm children. If you own the life insurance policy and control who benefits from it, it’s includable in your estate for estate tax purposes.
If you have your life insurance policy owned in an Irrevocable Life Insurance Trust (ILIT), that policy is out of your estate. If you create a trust, and the trustee purchases the life insurance policy, it’s not taxed on your estate tax return. You could give cash to the trust, so the trustee has the ability to purchase the payment and use your annual exclusions to cover those premium payments.
Farmland partnerships work very well to maintain the successor’s operation. Many times, to be a viable farm, the farmland must be available for the farming children to farm. You could put restrictions on that farmland in the partnership, giving a family member first right to farm. In a farmland partnership, farming children can operate it and non-farming children can benefit from it; for example, through land rented to the farm operation.
If you create the partnership, you can set the buy-sell provisions. This sets the tone to the family of what the parents’ intentions are for the farmland. You could also have discounts with tenants and common property.
Trusts, Loans and Refinancing
You might refinance your existing loans for lower interest rates or consider one of the following options:
Farm vs. Off-Farm Children
Navigating what and how to distribute to farming children versus non-farming children can be challenging. You must determine what is fair versus equal in terms of your heirs and your farm. These decisions are unique to your situation, but the right professional can help you make determinations from an unbiased perspective that satisfy all parties. For instance, you could distribute your life insurance to off-farm children.
Watch our webinar recording on Estate Planning.
3. Harvest: Outline Your Farm Transition Plan
Once you’ve gotten organized in terms of finances and estate planning, it’s time to develop your transition plan. The keys to successful farm transition planning include:
There is a great deal to understand about the intricacies of farm transition. Working with knowledgeable and experienced agricultural advisors will help ensure you make the best decision for your family’s farm.
Importance of Proactive Transition Planning
When planning for the future of your family farm, each stage of the transition process is important:
Having the necessary plans in place and having essential conversations with your family and farm colleagues well in advance of your transition, along with having the right advisors on your team to help guide the transition, will assure peace of mind in the long run.
Watch our webinar recording on Transition Planning.