Estate Planning: planting the seed of success for your farm’s future

No matter what stage you may be at in life, at some point you’ll likely want to retire. Part of planning for retirement is also planning for your estate and what will happen when you are no longer able to be in control of your farm and the assets you worked hard to enjoy.

Farmers are in a unique situation, since many live where they work and want to ensure that their farming or ranching operations are in safe hands for the next generation. Knowing where to start and what steps to take to ensure your future will put you and your family at ease.

We talked to Andrew Knutson, attorney at law and Heather Gessner of SDSU Extension to answer some of the biggest questions people have as they plan for the future of their farms.

Where to start

When it comes to succession planning, which includes retirement and estate planning, the lack of planning can be detrimental to a farm family.

Knutson explained that estate planning is more than simply defining “who gets what” after someone dies.

“Farmers’ and ranchers’ personal lives, business and family are usually inextricably intertwined – more so than other business owners,” Knutson said. “Other business owners are not tasked with the stewardship of land from generation to generation, just to keep the business viable. Other business owners can leave work at the office.”

Having the right information can make this planning process easier and put our state’s farmers and ranchers more at ease.

“The flood of information farmers receive via farm magazines, trade shows, the internet and other presentations can paralyze them,” said Gessner. “The overload prevents them from knowing what the ‘right thing to do’ is, so nothing is done.”

She recommends finding an estate planning attorney that you are comfortable with and can have open and easy conversations with, since they will be the ones to help you create the best plan for your future and unique plans.

“Tell the attorney what you want to happen to your operation,” Gessner said. “Trust them to implement a plan that helps accomplish all your goals.”

According to Knutson, here are some of the most common goals of agriculture clients as they begin the estate planning process:

• Be fair to all kids – and fair may not mean equal.
• Keep family land in the family.
• Secure the right (and the rate) for the farming child to rent land that may be held for the benefit of his or her siblings.
• Pass assets to grandchildren in the event a child dies.
• Preserve assets for a “spendthrift” child (someone who is irresponsible with money).
• Preserve and prolong assets for anyone struck with a disability or nursing home claim.
• Avoid estate tax, not only at your death but also on the death of the next generation.
• Avoid probate.
• Mitigate or eliminate capital gains tax.

He also said that farmers can really help themselves by putting some thought into how they want their affairs to look after they’ve passed away.

“Keep a ‘five-year focus’– plan as if something might happen in the next five years. This helps focus the mind away from the ifs and buts, even if your plan may be designed to carry on for generations. Also, think in terms of broad goals. Your attorney will help flush out the details if they are doing their job.”

Steps to take

Even if you aren’t ready to retire or pass your estate on to the next generation, there are steps you can take to make this process easier for not only yourself but also your family, should anything happen to you.

Since farmers and ranchers have to coordinate their succession plans not only as end-of-life plans but also as business succession plans, Knutson says that farmers may want to discuss options of partnering with the next generation. This may include handing over more decision-making authority in a structured way while they are still alive.

According to Gessner, one of the first steps farmers can take now is to begin estimating how late into life they plan on remaining a full-time, active farmer. This estimate could change as plans change but will help in the planning process.

“Social Security income is determined by a formula that includes income reported to the IRS over the past years,” Gessner said. “If you have always minimized the amount of income reported, farmers may need to change that strategy if they will rely on Social Security as part of their monthly income.”

She suggests evaluating your Social Security income formula and funding individual retirement accounts while you are still actively farming.

“Another income source for the farmer is through renting their ground to their heirs or another farmer,” Gessner said. “Renting out the land can change the farmers’ income tax bracket, so it needs to be evaluated. Additionally, selling land results in taxable income, a need to invest the funds, and other topics need to be assessed and managed.”

Knutson did note there are tax efficient ways to sell land and / or business interests within the family. There is also a way to sell land without paying capital gains tax, other than 1031 exchanges.

He also indicated that for farmers and ranchers succession planning is more than probate and tax issues. It also includes helping farmers answer these questions and be confident in the answers:

• What guarantees the operation continues, or that land stays in the family?
• How will rent be determined if siblings agree to keep the land?
• Who is going to rent the land?
• Can the farming child afford the rent?
• How can you hedge against dangerous fractionalization and undivided ownership?

New for 2021

With the estate tax laws that are in place, the current threshold for tax exemptions is $11.7 million for an individual and double that for couples. Anything over this amount is taxed at a rate of 40%.

This exemption is set to be cut in half in 2026 but with democrats in control of the executive and legislative branches of government this could happen as soon as this year.

Congress and the president have the ability to change this amount prior to 2026 with a vote or by repealing the Tax Cuts and Jobs Act put in place in December of 2017. This could take place within the first year of the Biden Administration and changes could be made retroactive to January 1, 2021. However, as Knutson suggests, it is more likely that it is more likely to start January 1, 2022.

He suggests that anyone who has land and assets with a combined fair market value more than $10 million per couple and $5 million per individual should meet with their estate planning as soon as possible to prepare for upcoming changes.

“This year presents a unique window of opportunity to make large non-charitable gifts, whether those gifts are to a child, grandchild, trust, or some other person or entity,” Knutson said. “This is due to the fact that the rates for Federal Gift Tax, Federal Estate Tax, and the Federal Generation-Skipping Transfer Tax are relatively low, while the amount of tax exemption available for those taxes is extraordinarily high. Also, due to low interest rates right now, it’s also a good year to make certain kinds of sales”

As Knutson pointed out, South Dakota doesn’t have a state gift or estate tax like other states. He says this is even more of a reason to give to a trust that qualifies as a South Dakota trust.

“There are a lot of strategies to mitigate or eliminate estate tax, but you have to act to utilize these strategies.”

Consulting an expert

Having questions is a natural part of the estate planning process. Don’t let the fear of making mistakes hold you back from making the best decisions.

An expert in your corner can help make the process easier for you and your family. Be sure to reach out to your financial and legal teams to help you in your planning process.

Resources:

SD Department of Human Services: Legal Services for Older Individuals

Elder Law Forum

Life Planning from SDSU Extension Services

Estate Tax- IRS

Please note that this information is intended to be educational and not legal advice. Please consult your legal team with questions about planning for your future and your estate.