Top 10 Things to Consider When Executing an Estate Plan for a Farm or Ranch
Overview: The following list briefly outlines the top 10 things to consider when developing an estate plan for a farming or ranching operation. This is not an exhaustive list and many of these items overlap.
For a comprehensive estate plan, each item should be viewed in context with the others. Whether you have an estate plan, or have nothing, the future is uncertain, but a comprehensive estate plan can help.
1.) Family Dynamics and Differing goals– Equal is not the same as Fair.
There are many family dynamics to a farm estate or succession plan, after all, it is a family business. The best way to sort through these dynamics is to identify each of the parties and their goals. For example, on-farm heirs may likely have differing goals compared to the off-farm heirs. In addition, if there is a surviving spouse, the spouse may have different needs than the other heirs.
Another concern, especially with an on-farm heir, is the potential for divorce. Parents may be reluctant to provide an inheritance of the family business to an heir who may become divorced and subject the family business to a divorce proceeding. In the event of a divorce, the parents may also decide to change their current estate plan to reflect a new family structure.
Finally, when creating an estate plan, you may want to consider family harmony. Everyone getting along through the process is a goal for many families. Having a common vision of where things are going and what everyone wants to accomplish is not always attainable, but a well-crafted estate plan will take these items into consideration and provide avenues for discussion and decisions while considering the differing family needs and goals of the parties.
2.) Succession of the Family Farm or Ranch
Often the biggest goal for farmers is to keep the family farm and business in the family by passing it on to the next generation. There are several options in preserving the operation for the future, all of which can be customized to your specific goals for your operation.
Things to consider when creating a succession plan include: whether there is someone who wants to continue operating the family business in it’s current state, the structure of the operation, participating parties, the timing of the transition of the business (can be gradual or all at once), harmonizing the interests of the on-farm heirs with that of the off-farm heirs, and many of the other items in this list.
Other common objectives of succession planning include:
• Bringing the next generation of owners and managers into the business and providing vocation for them
• Establishing a base for a financially stable and successful business into the future and for personal satisfaction of the next generation of owners and managers
• Providing a plan for the older generation of owners and managers to retire the way they want
• Providing an estate plan that is fair to on-farm and off-farm heirs, and
• Minimizing the tax impact of property transfers
Thorough tax planning is essential to preserve an estate’s value. A proper estate plan can avoid many of the tax pitfalls that can adversely affect inheritance or incur unnecessary expense for the heirs. A good estate plan will guard against these pitfalls in preparation for death, but also, plan for and protect the value of any lifetime property transfers.
4.) Long-Term Care/Retirement Planning
Long-term care and retirement planning is another essential part of an estate plan. The potential for the entire value of an estate to be spent on providing long-term care is a very real issue. An estate plan and some of the other tools in this list can help alleviate some of these costs and ensure that the next generation still has an inheritance left.
Life expectancy is uncertain, but lifestyle can be more closely gauged. Given this, there is potential to outlive your retirement funds. It may be another goal for the retired person to have the farming or ranching operation continue to provide the retired person with income whether that comes from a purchase agreement between the retiree and the next generation, rental income or sharecropping income from the farm, government farm program payments, or another source. Note that for any lease arrangement it is highly recommended that you have a written lease.
5.) Farm Program Eligibility
For the next generation to receive farm program funds or for purposes of retirement funding, the operation needs to maintain its eligibility for farm program payments through the USDA. If there is an entity, potential pitfalls include: how the entity is structured, who is involved in the operation, whether the operation is leased or if there is material participation, and more. Because farm program payments can be a good source of retirement income, a well-thought-out estate and business plan should be utilized to maximize payment eligibility.
6.) Entity Structuring – LLC, Partnership, Corporation, Individual Ownership
An essential discussion for farm succession and estate planning is how the entity is structured, or whether to form an entity. Entity structures can be sole proprietorships, various forms of partnerships, limited liability companies (LLC), or corporations. There are different benefits for each entity type but the best way to decide whether to form an entity or what entity to form is to look at what the goals are for the operation and its participants. Some important considerations when deciding on an entity structure are the tax consequences, farm program eligibility, and how to structure the entity so as to provide or not provide one person or group with power over another. Although it may seem complicated, an entity structure can be a better way of turning over management of the day-to-day operations for the farm or ranch and an easier way of bringing in the next generation while maintaining some control and receiving income from the operation.
7.) Types of Transfers
There are several different options for transferring property with an estate plan. There are two basic categories of transfers: (1) transfers that occur upon and after death and (2) lifetime transfers. For lifetime transfers, there are several tax events that can be triggered depending on the type of transfer. However, lifetime transfers can be a beneficial tool to bring the next generation into the operation of the farm and can provide income for retirement or unforeseen expenses.
8.) Inventory of property, title on property, beneficiary designations, preserving records/documents
To make sure the estate plan goes according to plan, a commonly overlooked step is keeping track of what property there is and how that property is titled. For example, if a piece of property is held in joint tenancy but the parents want the property distributed equally to the children, there may be an issue as to how that property is distributed that does not comply with the parents’ original wishes. Furthermore, if there is an entity involved or a will that pours property over into a trust, there could be additional issues.
9.) Additional tools
- Powers of attorney:
Powers of attorney help with operation of day-to-day business in the event you would become incapacitated, or if you would like someone to manage things for you during retirement.
- Healthcare directives:
Health directives are extremely helpful for letting the family know what your wishes are in the event you would become incapacitated and healthcare decisions would need to be made.
- Buy-Sell Agreements:
Can be helpful to ensure the farm stays in the hands of the family members in the event one or more persons decides to sell their interest.
- Funeral Arrangements/Expenses:
These are helpful to guiding the family to what your wishes are for your funeral arrangements.
- Life Insurance:
A life insurance policy can be very beneficial to a succession plan where there are on-farm and off-farm heirs. For example, the on-farm heirs who plan to continue the operation can receive the land and equipment while the off-farm heirs receive a cash payment from a life insurance policy. Life Insurance policies are also an important tool in alleviating debt.
Long Term Care, Insurance, Trust(s), Will(s), Lease Agreement(s), Letters of Instruction, Written Family Agreements, Buy-Sell Agreements, Generation Skipping Transfers, Special Needs Trusts
10.) Review and Update your Estate Plan RegularlyExpense now means less expense and headache in the future.
A thorough estate plan might not be an expense that a farming operation believes is necessary to incur, especially in tough financial times where cutting costs and streamlining an operation is a goal. However, countless farms have been drastically reduced or liquidated because there was no estate plan, the estate plan in existence was inadequate, or the family did not update the estate plan. Shockingly, the first example of no estate plan being in place is all too commonplace. Many people think that they simply do not have enough property to need an estate plan, but this is not the case.
Things change. Because of this, once you have an estate plan in place, it is necessary to review and update your estate plan regularly. It is always a good idea to update an estate plan because when an estate plan is created, it’s like a balance sheet, in that it’s a snapshot of how things are at that moment; a plan may not necessarily evolve with changes to your life. Life happens and there will come a time where it is too late to execute an estate plan or update an existing one. The estate plan should ensure the smoothest possible transition for everyone involved. A good estate plan is the best way to ensure a stable, organized future and is a final gift to one’s family.