By: Robert Moore, Attorney, Wright & Moore
Previously published by the Ohio Farmer
Each family farm facing a succession to the next generation must come up with a strategy to transfer ownership. Depending on the situation, it can be challenging to transfer ownership that does not trigger taxes, cause financial stress or cause financial discomfort for the family. There are several strategies that can be implemented to bring the next generation into the farming operation.
One of the primary factors that creates the succession challenge is the capital-intensive nature of farming. Even a moderately sized farming operation may have several million dollars in land and another million dollars in machinery and grain and crops. It can be daunting for a young person to come into a multimillion-dollar farming operation. Also, parents may be less inclined to make very large gifts to the farming heir for fear of being unfair to off-farm heirs.
Divide existing operation
One strategy that can be used is to divide one farming operation into several smaller entities. For example, let’s assume Ohio Farms is owned by Mom and Dad and has land worth $2 million, machinery worth $500,000 and grain worth $500,000. Mom and Dad want to bring in Daughter as an equal one-third owner of the farming operation. If all assets are kept together, Daughter’s third will be worth $1 million. Daughter probably doesn’t have $1 million to buy into the operation, and Mom and Dad may not want to make a $1 million gift for fear of being unfair to Son, who is not involved in the farming operation.
Mom and Dad can split the farm up into separate entities. The $2 million land can be put into an LLC owned by Mom and Dad, and the $500,000 of machinery can be put into a separate LLC. Now the farming operation is worth $500,000. Daughter’s third would now be only $167,000 — a much more manageable number. Mom and Dad may be willing to gift this amount, Daughter may be able to pay this amount (perhaps over time) or some combination of the two. The farming operation will lease the land and machinery from Mom and Dad’s LLCs. This scenario allows Daughter to be a one-third owner, minimizes the purchase or gift required to get Daughter in as an equal owner and ensures Mom and Dad are adequately paid for their land and machinery assets.
Set up 2nd operation
Another strategy is to set up the next generation with his or her own farming operation. Using the above example, Daughter sets up a new LLC for her farming operation. Mom and Dad let Daughter farm 100 acres of their owned ground or rented ground. Daughter leases the equipment from Mom and Dad, who may loan money to Daughter for operating costs. The following year, Mom and Dad turn over more ground to Daughter. Eventually, Daughter’s farming operation will be farming all the land and will have purchased its own machinery. Over the years, Mom and Dad will have discontinued purchasing machinery, instead putting that money towards retirement income, and transitioning to more of a landowner leasing land to Daughter. Mom and Dad can still provide labor and assistance to Daughter but do not have the burden of day-to-day management decisions or taking on debt.
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Subsidy usually necessary
Regardless of the strategy used, the older generation will almost always have to subsidize the younger generation in some way. It is too difficult for the younger generation to pay full price for faming assets and have a viable operation. The subsidies can be in the form of gifts, discounted prices, loans and/or favorable leases. In considering the subsidy, the older generation needs to consider retirement income needs, income and capital gain tax ramifications, and retaining control over assets.
The scenarios listed above are just two of many possibilities for bringing in the next generation to the farm. Each scenario has its own tax and legal implications. Be sure to consult with an accountant and attorney before implementing the plan. There is a succession plan for almost everybody. If you are not sure what the best plan is for you, seek out legal, financial or other assistance to help develop the best plan.