Planning for the succession of the family farm poses some unique challenges and should not be undertaken by those who are not familiar with the industry. While farmers are similar to many closely held business owners, there are some situations that make them unique. For example, farmers tend to have high “book value” because so much of their estate consists of land. However, they tend to have low cash value and lack liquidity. This situation used to cause a severe problem when a farmer died because the value of their estate would most often exceed the amount of the exemption or “unified credit” for federal estate taxes and the estate would struggle to find sufficient cash to pay the estate tax. However, this situation has been greatly mitigated now that the unified credit amount is over $5,000,000 per person and over $10,000,000 per married couple. However, cash flow can still be an issue.
Another situation that many farmers face is that some of their children are active in the farm and some are not. This becomes a problem when the farmer dies and wants to divide the estate equally between the children. Rarely is there enough cash to pay to the non-farming children the amount equal to the property the farming children will take. The struggle between what is equal vs what is equitable looms large over many farming families. Sometimes life insurance policies may be purchased to infuse the additional cash into the estate, however, life insurance may not be an affordable option if it is not purchased when the farmer is young and insurable.
Another option that many farming families use to address this situation is Self-Cancelling Installment Notes (also referred to as “SCIN”s) which establish a buy-out plan for the farming children that is forgiven at the parent farmer’s death. These can work in some situations but one disadvantage is that the farming/purchasing children will not receive a “step-up” in basis for tax purposes which they would receive if they simply inherited the property.
Many farmers also hold leases for mineral, oil, and gas interests on the land. Some farmers wish to pass these on to their children equally regardless of whether the child is involved in the farm. This can be accomplished by severing the surface rights to the land and holding the leases separately, usually in some form of trust. Other issues that farmers may have to resolve in the transfer of their property include P.A. 116 contracts, uncapping of the taxable amount of the property, transfer of livestock, equipment and income stream involved with the farm operation. It is not unusual to have multiple generations of the family working together on the farm and comingling accounts, equipment and labor without formalized documents such as Articles of Incorporation, By-Laws, or Partnership Agreements. This can cause significant problems if one of the family members dies without proper planning.
While nobody enjoys going through the process of estate and succession planning, it is well worth the time and the peace of mind to know that a good plan is in place to carry on the farm and ensure family harmony for the next generation.