Guest Column by Steve Zenk

Each year, thousands of American farm families wrestle with the task of passing the farm to future generations. A lot is at stake in this delicate handoff, including income and security for the senior generation, control and authority for the younger generation, fairness and equity for non-farming family members and, of course, dealing with the government’s “tax bite.”

Planning for the transfer of one’s farm from one generation to the next can be aided by following some very practical steps from Thrivent Financial.

 

Start the conversation.  If you’re the farm owner, sit down with your spouse and children to tell them of your desire to pass the farm to the next generation. Listen to their thoughts about farm operations and succession. Which child or children have an interest in operating the farm? Discuss your preliminary thoughts about releasing authority to them for farm operations.

Talk through possible time frames for the transfer to take place.  If more than one child wants to operate the farm, discuss your thoughts about the farm supporting multiple families. Exchange ideas about a transition that treats everyone equitably.

You owe it to your loved ones to address this subject in advance of a potential crisis caused by death or disability. Don’t delay this conversation.

Consider retirement, not just succession.  While many farm families have a plan in place to pass the farm to the younger generation in the event of the farm owner’s death, too few farmers have adequately planned for a retirement.

Financial services professionals can assist seniors in preparing for their golden years by helping farm families analyze potential sources of retirement income, eligibility for Social Security benefits, adequacy of life and health insurance coverage, and investment allocations, among others.

Beware of debt AND taxes.   Giving the next generation of farm owners the ability to operate the farm without saddling them with excessive debt is essential. It does little good to leave your loved ones with the farm only to see them forced to sell it in whole or in parts to pay off existing debt.

Perhaps no tool is more valuable in preserving the farm for succeeding generations than life insurance. Under current tax laws, life insurance death benefits are generally income tax free, and families can use proceeds to pay taxes or expenses at the time of the insured’s death. In addition, proceeds from life insurance can be a ready source of cash to equalize the distribution of the estate to adult children who have no interest in operating the farm.

The 2014 federal estate and gift tax laws provide a life time exclusion amount of $5,340,000 per person.  With a proper financial strategy in place a married couple could transfer to someone outside of the marriage (assuming both spouse die in 2014) $10,680,000 in money and property without incurring federal estate taxes. In addition, the life time exclusion amount is portable amongst spouses. The representative of a deceased spouse’s estate can transfer any unused exclusion amount to a surviving spouse.  A surviving spouse may use this unused exclusion amount in addition to the surviving spouse’s life time exclusion amount to shelter gifts she or he would make during life or at death.

If the transfer of money or property is made in 2014 while the farm owner is alive, the federal gift tax lifetime exemption is $5,340,000 ($10,680,000 for a couple).  A gift in excess of the $5,340,000 federal gift exemption in 2014 is taxed at the top marginal federal estate tax bracket of 40%.

In addition to the estate and gift taxes reviewed above there could be state gift and state death taxes that need to be considered.  A financial services professional can help explain applicable taxes.

For many farm owners, a combination of life insurance and trusts may help establish equity among children, provide income for the owners and facilitate the transfer of a farm property to the next generation.

Work with trusted advisors to build and execute your succession plan.  In building a farm succession plan for your family, work with a collaboration of experienced professionals:  an attorney, capable of establishing proper wills, trusts and durable power of attorney; an accountant, familiar with farm and tax issues; and a financial services professional experienced in estate strategies. Together, this group of professionals can work to develop a farm succession plan that keeps the family farm in the family.

Passing the family farm to the next generation may not be easy, but it surely is rewarding. Don’t delay in developing a farm succession plan to secure your and your family’s future.