What You Need to Know, If the Next Generation Is Inheriting the Family Farm

Understanding the tax liabilities for inheriting, buying or being gifted the family farm, is critical to avoid a costly financial misstep, says Capital Press in the article “The family farm is coming to you: What’s next?” You’ll need to work closely with your estate planning attorney and CPA to make sure you understand the basis in the real estate, especially if the property is sold and taxes will need to be paid. How you inherit the property, makes a big difference in the tax bill.

If you receive the property as a gift from parents while they are alive, then you retain their income tax basis in the property. If they inherited it also, they likely have a low tax basis. Farms with a basis of $50,000 that are now worth $2 million are not unusual. If the farm is sold, there will be a capital gains tax on the difference between the basis and the present value, which could be more than $600,000.

If you inherit the farm from a parent and then sell it for $2 million, its value at the time of their death, you would not have to pay a capital gains tax. That saves $600,000.

The estate tax may not be so bad, depending upon your state’s estate tax, which is probably lower than the highest capital gains rate. If you live in Oregon, you may be eligible for the Oregon National Resource Credit, which was created to reduce Oregon estate taxes on family farms. Your estate planning attorney will be able to help you plan for and manage these taxes.

If you bought the farm from a parent’s trust or estate for $2 million, then you have a $2 million basis in the property and will probably not owe any property gains tax, if you eventually sell it for $2 million.

Just be sure that you comply with all reporting requirements. If you are in Oregon and took the Oregon National Resource Credit, then for five out of eight years after the death, the recipient of the inherited property is required to file an annual certification to keep the credit that was used to lower the estate tax. Failure to comply, means that a portion of the estate tax will have to be repaid.

If you own the farm without other family members, you should start planning your next steps. To whom do you want to pass the farm? If you want to keep the farm in the family, work with an attorney who is familiar with farm families, so that you can keep working the land and reduce any disputes.

Farmers often separate business operations from the land, with the operations held by one business and the land held by another entity. This allows the estate planning attorney to plan for succession in how operations and land are transferred to the next generation. It also provides asset protection, while you are alive.

Make sure that your farm succession plan and your estate plan are aligned. A common issue is finding that buy-sell documents don’t align with the will or trust. Some farmers use a revocable living trust as a will, so they can incorporate estate tax planning and transition the farm privately upon death.

For more on Legacy Planning for your Family Farm, click here.

Reference: Capital Press (March 24, 2019) “The family farm is coming to you: What’s next?”

How Do I Plan the Succession of My Business?

The San Antonio Business Journal’s recent article, “Plan your exit even if you never plan to leave your business,” explains that many owners think it’s okay to delay preparing for their business exit. Some think there’s no reason to plan for their exit whatsoever, because they’re willing to die in the business. Owners should always have an exit plan prepared and ready. Things change, like health, the economy, and opportunities. Be ready and consider these three key ways exit planning can help you and your business—even if you don’t intend to leave.

Decrease your taxes. Whether you ultimately decide to sell your business, transfer ownership or die working, you probably don’t want to pay more taxes than you have to. There are two ways exit planning can help minimize taxes, even if you truly want to work until you die. If your business value increases, your estate can benefit from a step-up in basis, if your ownership transfers pursuant to your estate plan. This saves your estate or beneficiaries from paying duplicate taxes on the entire business value.

The lifetime exclusion for gift and estate taxes is now to the point where most small and mid-sized business owners don’t need to pay estate taxes, if owners have created an appropriate estate plan. Your exit plan lets you leverage these benefits, since estate planning is a vital component in proper exit planning.

Protect your values. If you created a work culture that’s so unique and strong that it helps your company stand out in the marketplace or your business gives back to the community through charity work, exit planning lets you pursue and preserve your progress toward those objectives. Exit planning strategies can foster the culture you’ve built, protect the employees who made the business a success, and help you build the legacy you want. Exit planning can help keep your chosen values front and center and protect its value, even without your presence.

Growing your business. Everyone wants their business to grow in value, but many business owners get to a point where they can’t grow the company any more, by simply doing the same things they’ve been doing. However, exit planning concentrates on building business value, whether you exit or not. These activities can help you increase your business’ growth potential, by emphasizing value drivers. Those are the aspects of your business that make it attractive to buyers. When it’s done the right way, installing value drivers can make your ownership even more fulfilling—concentrating on certain value drivers can let you focus on only your favorite tasks within the business and delegate your least favorite responsibilities to other qualified employees.

Use exit planning to address concerns about the future of your business, family, and employees.

Reference: The San Antonio Business Journal (October 16, 2018) “Plan your exit even if you never plan to leave your business”