Contributed by Brooke Didier Starks Meyer Capel, A Professional Corporation, Champaign, Illinois
1. Be Practical. Farmers are rightfully proud of the legacies they’ve built and want to safeguard them for years to come. One hundred years from now, though, a farmer with three children could have as many as 120 descendants. Plans that irrevocably lock farmland in arrangements for extensive years eventually run the risk of resulting in unrealistic outcomes. Imagine the income from an 800-acre farm being split among 120 people: each is earning the net income from just 6.6 acres. What sounds enticing on first blush may not have such a great effect in practice.
2. Be Open to A Combination of Tools. Often, succession plans are not one-size-fits-all and instead use a combination of tools. Consider the use of installment contracts for equipment sales, rights of first refusal (not triggered until the owner decides to sell), options to farm or purchase (triggered by the person granted the option), and the possible purchase of life insurance even later in life to balance the inheritances of off-farm heirs with on-farm heirs.
3. Consider Use of An Entity. Entities such as limited liability companies (LLCs) and trusts can be used to transfer small fractions of the greater farm operation to beneficiaries over a period of years in a tax-effective manner. The instruments governing those entities can be crafted to impose limitations on who may be a beneficiary (precluding non-blood relatives and creditors of beneficiaries, for example). The instruments can also provide options to farm, preclusions on sales, and rights of the other beneficiaries/members to buy out the interests of an exiting party. Entities can allow a slow transition of ownership from the parent generation to the child generation and can allow an on-farm heir to manage the operation while allowing off-farm heirs to share passively in income.
4. Rules Change — Frequently. Transfers for less-than-fair-market value are gifts. The Tax Cuts and Jobs Act (TCJA) enacted in December 2017 doubled the federal estate and gift tax exemption, causing individuals to be able to pass roughly $11.2 million in gifts before being assessed a federal tax … BUT the legislation is set to sunset December 31, 2025, when the law will revert back to the pre-TCJA numbers. Additionally, some states (including major agricultural states Iowa and Illinois) still impose their own state estate or inheritance taxes, which are often overlooked in planning. Know the rules and limitations on how much you can gift both during life and at death, and keep abreast of changes because they happen often.
5. Communicate, Communicate, Communicate. In practice, clients frequently stew over how to craft the succession or how to divide a farm among children, some of whom, unbeknownst to their parents, have no interest at all in owning a share of the operation or the land. Moreover, a majority of the conflicts that land in the attorney’s office (and perhaps the courtroom) occur when beneficiaries had an expectation that inheritances would work out differently from how they did. In both instances, bringing all the parties (on-farm and off-farm) to the table to talk long before any plan is in motion will have immeasurable benefit to preserving family harmony long after the transition has taken place.
Brooke Didier Starks is a shareholder attorney at Meyer Capel, A Professional Corporation in Champaign, Illinois. This article does not constitute legal advice and does not create an attorney client relationship but is provided for informational purposes only. You should consult with your personal attorney regarding your succession plan. For more about Ms. Starks, visit www.meyercapel.com/brooke-starks