5 farm transition and estate planning strategies

Because many farmers don’t see retirement as a part of their long-term plan, farm transition or succession planning can be often overlooked or ignored by farmers. With no formal farm transition plan is place, properly transitioning a farm to the next generation can create unnecessary challenges and burdens on the farm family and heirs, while financially jeopardizing the farm’s survival.

“If an operator is thinking the farm should be distributed equally among multiple siblings via a living will, this may force the new farm successor to enter into an agreement to pay the other heirs for their shares of the farm,” according to Steve Hamilton, JD, CLU^®, ChFC^®, of Nationwide’s Advanced Consulting Group. “This is not only unfair to the new farm successor, but it may jeopardize the ability of the farm to survive.”

That kind of situation can be avoided with a well-planned farm transition strategy. A Land As Your Legacy^® trained financial professional can help you more fairly distribute farm assets to heirs and set up the farm successor for long-term financial success.

Consider these five farm transition strategies

1. Business entity ownership. This option creates “unit (or share) values” for a farm business structure, much like a Limited Liability Company (LLC) or corporation. This way, a predecessor can gradually increase the successor’s ownership rights over time to keep farm equity management control in the hands of the active farmer while still passing on assets to other heirs.

2. Buy/sell arrangement. This arrangement provide a legal structure for the successor to purchase the farm upon certain life events, like a severe illness or death. It is often funded with life insurance that will someday be used both to purchase the operation at an agreed-upon price and to be able to “buy out” any non-farm heirs.

3. Installment sale. Especially for farms seeing rapid growth, an installment sale is one way to essentially “freeze” the value of the farm. The successor begins making installment payments over an agreed-upon time frame. This helps transition farm assets to the successor over time and avoids federal estate taxes on any future growth of the operation.

4. Intentionally defective grantor trust (IDGT). Another way to freeze farm assets, creating an IDGT can help the predecessor transfer farm assets through a trust. It’s similar to an installment sale, but the assets go into the trust, not directly to the successor. The trust can provide greater control of the assets. This can be complicated, so it requires the guidance of a knowledgeable attorney.

5. Inheritance offset. The predecessor can make the non-farm heirs beneficiaries of their life insurance in equal amounts and leave farm assets to the successor. This way, all heirs receive the same amount, but the farm stays in the hands of the new owner and operator.

These strategies may be used independently or in combination. With any such strategy, consult legal and tax counsel and have a qualified appraiser correctly value farm assets. “Tomorrow’s success depends on today’s preparation," Hamilton said.

Always consult with your tax and legal counsel to determine the implications of implementing any of the strategies mentioned above.