Jill Ransom’s story is familiar. She spent her adulthood living apart from the family business, visiting the farm several times a year. At the reading of the will, arrangements provided Jill five years to decide. Within two years and a series of unexpected events, Jill’s family farm became another statistic. Only 20% of family farms survive the transfer to the second generation, and far fewer arrive at the third. Few farmers know the steps or how to implement an exit strategy. Without a viable plan in place, heirs are forced into poor decisions.
What is a Farm Succession Plan?
The farm is a legacy of name, reputation, and goods. It’s more than a piece of land; it comprises a business with viable assets like a home, barns, equipment, valuable property, and quite possibly livestock. The memories, good times and bad, add to the sentimental value. The solution is to create well in advance a succession plan, which includes financial goals upon retirement, a pre-determined income, and a time frame for transition. Open communication helps resolve concerns and expectations with the people involved and prevents misunderstandings.
Questions to ponder:
- How much income is needed for retirement?
- Do I want the farm to remain in the family?
- Is there an individual or are there multiple people who can take over operations? Could they work as a team approach?
- Do I remain involved in business decisions after the transition occurs?
Taxes and Gifts
A will is one security of a family business. The legal document aptly names conditions of the property and its contents to declared members of the testator. Fortunately, North Carolina residents are not penalized by an instate inheritance or estate tax, unless it exceeds $12.06 million. Additionally, if the recipient(s) decides to keep the farm, they benefit from reduced capital gains taxes.
Other ways to transfer land:
- Gifts: More complicated than it initially sounds. Land can be gifted from the owner at any time or documented through a will, termed a “bequest.” Among the four different types, the residuary clause identifies a recipient to receive the estate. Whether as a whole or divided, gifting assets can be a valuable tool to help beginning farmers acquire land, farm equipment, assets, or money. Keep in mind, as families plan for the future, it’s vital not to rely on current-year exemptions. Additionally, gifts may impact control over assets, Medicare eligibility, and estate taxes.
- Life estates: A popular option for farmers whose successor is willing to hold the property for their lifetime. The “life estate” applies to real property, such as land, buildings, and equipment. Through a deed, the property owner has full use of their property and is protected against the inclusion of a Medicaid recovery process. Upon death, the estate is automatically transferred to the beneficiary.
- Creating a Trust: In addition to the will, a trust is a legal document outlining the terms of a property and the distribution of revenue to beneficiaries. Easily manageable by adding or removing assets, changing intentions, or, if needed, dissolving the trust. Upon death, the “irrevocable trust” bequeaths the legal ownership to a trustee, separating the trust’s assets from the estate. Selling, on the other hand, may be a restriction; it’s not indefinite. Initiating a trust is ideal for anyone who seeks to transfer the family farm without fear of estate taxes.
Contacting the Experts
The best source for answers is a local accountant who has specialized estate planning experience. Before scheduling a consultation, think about the most relevant information, such as defining the plan, a tentative date to transition, and identifying the successor. Ascertain your financial picture and tax situation, too. By having documents ready, you’ll be able to get started planning your future.