This is my fourth and last column in a series on the topic of helping farm families to plan their future around the farm business. I have discussed the importance of developing a succession plan and that it is important to identify your exit options and to analyze each of them. The whole process is finished with a complete estate plan. Today, I will go over the steps for gathering and documenting your assets and list some of the special challenges for farmers as they complete their estate plans.
SCORE has partnered with Mass Mutual to develop some great resources for this topic and makes them available on its website. I will share some of that content in this column. The information here is not written or intended as specific tax or legal advice. SCORE and MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice.
As a farmer, you know how important it is to be prepared for any contingency. And you should approach your business exit with as much planning and preparation as you run your farm. Now it's time to complete the process with your estate plan.
Start your planning by gathering and documenting your assets. Before you can create an estate plan, you need to determine what you own and how much it is worth. You’ll need the following documents:
- Real estate documents: These include deeds, land contracts, abstracts, or title insurance policies, and have legal descriptions of your property, show the record titleholder and form of ownership.
- Real estate tax statements: These summarize all the real estate you own and give a baseline value of the property.
- Last depreciation schedule: This shows the tax value of the property.
- Livestock inventory: The most recent count of cows, bred heifers, open heifers, calves, bulls, etc. (if steers include size), etc.
- Feed inventory: Estimate what’s on hand.
- List of machinery: Include as much detail as you can and give an estimated value.
- Aerial photograph or other picture of the farm: This is not strictly necessary for an asset list, but with drone technology, it’s easy to obtain.
- Acreage breakdown: Break down your total acreage by tillable, pasture, wooded, nonproductive.
- Balance sheet: A balance sheet or other record that shows your liabilities. If you produce a market value balance sheet for your bank each year, that will contain most of the information you need.
Estate planning challenges for farmers
Farmers face different challenges, from an estate planning perspective, than other business owners, including:
- The federal crop subsidy programs are often changed. When the economy is uncertain, there are often calls to decrease farm subsidies.
- Due to the size of many farmer’s estates, particularly in the land’s value, estate taxes are more likely to be collected.
- Non-liquid assets in the form of land, equipment, and livestock, along with seasonal cash flows, may be a problem.
- It may be challenging to keep the farm in the family. What if some — or all — of your kids don’t want to work the farm. How will your estate plan take that into consideration?
Income-producing potential vs. fair market value
There is a special valuation rule for farmland, created to reduce the number of farmers forced to sell their farms to pay federal estate taxes.
The Tax Reform Act of 1976 added Section 2032A to the Internal Revenue Service Code. If specific requirements are satisfied, the executor of an estate may elect to value farm or other real estate used in family businesses for federal estate tax purposes by one of the methods provided in Section 2032A rather than at its Fair Market Value as required by section 2031.
Make sure to consult with your tax and legal advisers to discuss your specific needs.
Your next steps
Estate planning is the act of preparing for the maximum transfer of wealth and assets during life and at death in the most tax-efficient manner possible.
- Review your current situation and plans.
- Determine what taxes, losses and conflicts could occur.
- Consider business and estate planning alternatives.
- Have legal documents prepared as needed.
- Determine the types of products you’ll need to fund your plan or cover taxes.
- Review plan annually with your advisers.
Dean Swanson is a volunteer Certified SCORE Mentor and former SCORE chapter chairman, district director and regional vice president for the North West Region.