Category Archives: Estate Planning

Sale of Farmland to an Intentionally Defective Irrevocable Trust

Farmland has more than quadrupled in price  in the last 8 years pushing the net worth of many mid-size farmers over $5 million. If you have over $5.25 million, you have an estate tax problem. You  could owe hundreds of thousands of dollars in estate taxes.

Ignoring the situation will cause you to lose opportunities to reduce or eliminate taxes. The longer you wait, the fewer options you will have.

There are many techniques you can use to transfer farmland to your children without paying any gift or estate tax. Here is an example of an aggressive strategy to pass up to $60 million to  your children and grandchildren tax-free.

  • Set up an irrevocable trust.
  • Fund the trust with up to $5.25 million in cash.
  • Set up  an agricultural LLC and deed your farmland to the LLC.
  • Sell shares of the LLC to trust. The trust should make a down payment of at least 10% of the purchase price using the cash you gave to the trust. The trust will pay the balance with a nine year interest only promissory note with a balloon payment due at the end. The trust will use the income from the land to pay the interest and principal.

This is only a summary of the transaction. These the advantages:

  • The value of the farmland is “frozen” for gift and estate tax purposes. All future appreciation of the land is not taxed.
  • You can sell minority interest of the LLC to the trust resulting in up to a 45% discount in the purchase price because of lack of marketability and lack of control. This allows you to sell $1 million worth of farmland to the trust for only $550,000.
  • You can structure the LLC so you retain control of the LLC even though the trust will eventually own most of the LLC. Even though most of the value is out of your estate, you still control the LLC and its farmland.
  • Using your $5.25 million lifetime gift and estate tax exemption, you can transfer up to $60 million in assets to your trust tax-free using this technique.

This is not a do-it-yourself plan. There are many details that must be carefully planned.
The sale to an intentionally defective trust incorporates many advanced estate planning techniques. I plan to explain them in more detail in future posts.


Farm Planning Basics

Estate planning with family farms presents unique and challenging issues.  Some of these include:

  • Asset Division: How to divide assets between children but keep the farm going for the child(ren) who operate it.
  • Farm Preservation: How to keep the family farm intact.
  • Management Succession: How to transfer management of the farm to a child upon retirement.
  • Retirement Income: How to provide income for your retirement years.
  • Longterm Care:How to protect your farm from longterm care costs.
  • Estate Taxes: How to pay estate taxes if most of the assets are in the farm.
  • Income Taxes: How to sell depreciated machinery without getting a huge income tax bill.

Careful Estate Planning and Farm Transition/Succession Planning are needed to address increasingly complex issues.

Estate PlanningEstate Planning is basically deciding who gets your stuff, when they will get it and how the transfer will be accomplished.

Who gets what is often one of the most difficult decisions to make when the bulk of your estate is farmland. Giving your children undivided interests in land produces difficulties for your children down the road. However, it is also hard to equitably divide your land, especially if you continue to buy and sell land after you create an estate plan.

In addition to land, plans for the following assets need to be made: livestock, crops, machinery, feed, investments, life insurance, savings, personal possessions, etc. The repayment of debts also needs to be addressed.

Farm Transition/Succession PlanningFarm transition/succession planning refers to creating a plan to transfer ownership and management of the farm upon the retirement, disability or death of the farmer. It involves more than simply dividing assets because the ability to continue the farm depends on the use of most, if not all the assets. This is a multi-faceted task with the primary objective of assuring that the family farm has the resources to continue operations for generations to come.

Transition planning also affects the current operation of the farm. By planning, you look at the best business structure to be currently using, examine and improve your farm management, reduce your liability, and make decisions on how you will transfer management to the next generation.

What to do

Educate yourself. Read about the issues and options available. Each person’s situation is unique. Identify the issues confronting you and your business. The best plans come from being fully informed.

Communicate. Talk with your spouse and children. They may have ideas that you do not see. Also, you will learn their expectations and feelings on these matters. Good family communication now will help avoid family problems later. Your children won’t be left wondering, “What were Mom and Dad thinking?!”

Gather Information. Make a list of your assets. Put together a Net Worth Statement. Gather all your current legal documents. This information is necessary to creating an estate plan.

Get Professional Help.  Consult with your CPA, financial advisor and/or an attorney. Find a competent attorney who understands the issues facing farmers and ranchers, who listens to your needs and who will help you craft a plan for transitioning the farm to the next generation.

Don’t Procrastinate. Protect your family, farm and yourself by taking action today. Don’t put it off any more.

Family Farm Partnerships?

Here’s the scenario: Mom and Dad die leaving the family farm to their children in undivided shares. Dad had retired so the tenant keeps farming land. All the children left the farm to pursue careers in big cities far away. Everything has been going smoothly with the farm. The children, now in their sixties, have a nostalgic view of the family farm. They get along because they continue to operate the farm like Dad did. But one day one of the children wakes up and realizes, “We are getting older, what will happen when my brother dies? I don’t want to deal with his kids!”

Are you prepared for a creditor forcing the sale of your land to pay for your nephew’s debts? If you own land as tenants in common, you are a partner with the other owners. Your partnership will come to an end. If you haven’t planned for its end, the chance of it ending badly are greatly increased.

Where do you begin? 
First, you need to understand the issues. Then you can begin to come up with a workable plan while everyone is still getting along. Here are some issues to address:

Peace in the Family
Money is important, but enduring peace in a family is more precious. By planning ahead, most disagreements and disputes can be settled amicably.

Control of Who Can Own the Farm
As ownership spreads to the next generations, the chance that a share of the farm will be sold to a third party increases. Your niece might want to raise some quick cash and sell her interest. A nephew’s interest might be attached by creditors. If you don’t agree to limit who can own the farm, you might find yourself dealing with an unwanted a new “partner.” Limited liability companies and rights of first refusal can be used to control who can own and control the farm.

Since real estate is an easy asset to find, it is important to reduce the exposure of liability to the land. Partnerships generally offer no protection from a partner’s creditors.

Nature of the Land
If your land is near a major metropolitan area, it may be ripe for commercial development. If so, how will the decisions be made to develop it. What if some want to keep the old farm intact?

It is easier for three people to agree than it is for nine or more. There is also the practical consideration of obtaining every owner’s signature on a sales agreement, farm lease, etc. You need to decide how decisions are to be made and who can make them. Below is a partial list of management decisions.

  • Choose a manager
  • Negotiate sales of land
  • Enter into sales agreements
  • Negotiate farm leases (if crop-share leases, then authority to sell crops.)
  • Hire professionals (accountants, attorneys, realtors, consultants, etc.)
  • Authority to write checks and pay expenses.
  • Negotiate and grant easements
  • Vote stock shares
  • Lease water rights
  • Sell water rights
  • Monitor farming operations
  • Safeguard documents
  • Negotiate oil and gas leases
  • File tax returns

Ownership by tenants in common only works if all the owners can be in agreement. But what if a great nephew wants to park his mobile home next to the prettiest pond in the pasture? He can. What if someone (or their creditor) wants to force the sale of the land? They can.

Since it is usually best to manage, develop or sell land in a coordinated and planned manner, it is prudent to minimize the consequences of these scenarios. This can be obtained through the use of limited liability companies, carefully drafted partnership agreements, or enforceable owner agreements.

Business Structures
Business structures to consider are partnerships, limited liability partnerships, limited liability companies and corporations. Nine states, including Kansas, restrict the ability of most corporations and LLCs from owning or operating agricultural land. Therefore, you must ensure any company you set up complies with state law.

If you own land as tenants in common, you need to plan. The plan could be as simple as selling the land. However, if you want the family farm to continue, work through the issues above and create a plan that will promote peace and prosperity in your family.

Farm Transition/Succession Planning

One of the biggest issues facing a farmer/rancher is how to manage the farm/ranch after retirement, disability or death. Most do not have a plan for the orderly succession of the management. Failure to plan may prevent you from retiring, break up the family farm, cause hardship for your spouse and/or cause siblings to fight.

Issues in Farm Transition, Succession & Estate Planning include:

  • Preparing the Family and the Business
  • Confronting issues of transition and control
  • Treatment of heirs including financial assistance
  • Developing the transition/success/plan outline & gathering documents and information
  • Choosing the proper estate planning tools & getting the tools in place

Succession plans typically include the following:

  1. Determine the practicallity of transferring your agribusiness. Are your operations viable for a transfer to make sense? Would it be better to simply lease your land to another farmer (e.g. your child)
  2. Chose a successor.  Is there a family member, friend or employ who is willing and able to assume the responsibilies of the operation?
  3. Begin transferring the ownership and management to the successor.  
  4. Finalize the transfer of ownership and management responsibilities.

The process is usually stretched over several years, especially when the plan is made early. A moderately paced transition will ensure the best chance for success and stability of the operation.

The following are suggestions for making a succession plan:

  • Set a target date for the final day as the primary decision-maker. Start shifing responsibilities ahead of time so you can oversee the transition while still on the farm.
  • Assist in the training and education of your successors along the way. Fully inform them of your daily work because you do necessary things that are not obvious to others.
  • Hold regular meetings to review finances, debt and revenue updates, workload expectations, work schedules, employee issues, equipment,  etc.
  • Work with professional advisors in the transfer of assets, debt restructuring, business structures, and other financial/legal issues.
  • Consider having a buy-out agreement in place if multiple successors are involved.
  • Consider off-farm family members’ expectations and needs. A buy-out agreement of off-farm heir’s interests may be appropriate.

Estate Planning Tools & Strategies

“One size fits all” estate plans do not exist. Every family and every farm is different. An array of tools and strategies exist to craft an estate plan. These tools are used to address the following issues in estate planning:

  • Minimize Tax
    • Federal estate, gift & generation-skipping taxes
    • Unified credit
    • Marital deduction
  • Avoid Probate
    • Wills vs. living trusts, joint tenancy, transfer-on-death deeds
    • Basis Adjustment
  • Long Term Care
  • Contests
  • Succession of Farm Management

The following are some of the tools and strategies available to the farmer/rancher to address these issues.

  • Living Trusts. Revocable or living trusts are almost a necessity in a complex estate plan. They are very flexible and provide you with maximum control of your property during your life and after death.
  • Irrevocable Trusts. Irrevocable trusts cannot be revoked after they have been made. This feature is useful in some areas of minimizing estate taxes and asset protection.
  • Life Insurance Trusts. Life insurance trusts can be used to purchase life insurance to be used in providing cash to the estate for use in paying bills and settling the estate. When properly structured, the life insurance proceeds will be free of estate taxes.
  • Generation Skipping Trusts.  If property is gifted to a skip-person, eg. a grandchild, a generation skipping tax (GST) is assessed on the gift. The rational of the government is to prevent skipping a generation thereby avoiding the estate/gift tax on the transfer from the child to the grandchild. Generation Skipping Trusts are used to maximize the GST credits and minimize the total estate/gift taxes due on multi-generational transfers.
  • Wills. Wills are a necessity, even if you have a trust. There are many issues that can arise that are handled only by a will. For instance, forgetting to put property into your trust, inheriting property after you created your trust, handling certain lawsuits after death, and nominating a guardian for a minor child.
  • Joint Tenancy.  Holding property in joint tenancy with the right of survivorship only works for simple, non-taxable estates. It usually is a bad idea to hold property in joint tenancy with a child. Many unintended consequences can occur. Transfer-on-death deeds are a better alternative.
  • Life Estates. A life estate is created when property is conveyed in a deed or devised by a will to a person for their life and then after death to others. If you want this type of arrangement, it is better to use a trust to accomplish your goals. Life estates can create conflicts between the life estate owner and the remaindermen over such things as who pays for repairs, etc. It is better to put the property under the control of a trustee.
  • Transfer-on-Death Deeds.  TODs can be very useful in very simple estates. They transfer property on the death of the owner easily and inexpensively.
  • Durable Powers of Attorney. Durable Powers of Attorney (DPA) are a necessary estate planning document. A DPA gives someone else the power to conduct your business if you are unable to do it yourself. The main benefit is avoid the need for a court-supervised (and expensive) guardianship and/or conservatorship.
  • Lifetime Gifts. You can reduce your estate by making outright gifts during your lifetime. A person can give up to $13,000 (as of 2011) to another person tax free. Lifetime gifting can be a powerful wealth transfer tool, but also has pitfalls for the unwary.
  • Charitable Trusts.  Charitable trusts can reduce the amount of estate and/or income tax owed while providing income for you or your heirs.
  • Business Structures. The farm/ranch can be operated as a partnership, limited liability partnership, corporation or limited liability company. The land could be transferred to the business entity and then shares of the entity would be transferred to the heirs.
  • Long Term Care Insurance.  Long term care insurance protects the assets of the farm from being sold to pay for the long term care of the owners.