Planning what will happen after your death can be a difficult thing to consider. However, regardless of how uncomfortable it might be, it is vital to have a plan in place sooner rather than later. Just as Noah started building the ark before it started raining, an effective estate plan is in place well before it is required. Each estate plan must be tailored to the individual planners goals. While farmers are no different than any other profession with respect to their need to prepare an estate plan, farmers are unique when you consider the assets they hold, how they plan for retirement, and the timing or reasons they may choose to transfer their assets before or after death.
While farmers hold a variety of assets, a majority of asset value is often tied up in land, machinery, and stored commodities. The most valuable asset farmers have is their land. Farmers rely on it for their livelihood, they can use it as collateral for loans, rent it out to supplement their retirement, and, at some point, pass it on to their children. Those assets are, however, highly illiquid.
Because a large portion of a farmer’s wealth tends to be tied up in assets the farmer needs to run the day-to-day farming operation, it creates unique situations for farmers in planning their estate. Each farmer’s family situation will vary just as with any other profession in North Dakota. If a farmer has no children, or if none of the children plan on taking over the farm, dividing up the land and assets can be a fairly straightforward process. There are several things to think about, however, if one or more of your children wants to take over the family farm.
The family farm is still important to many farmers in North Dakota. If a farmer has four children, and three of them choose a profession other than farming, but one child wants to take over the family farm, that child will eventually need land to farm, machinery, buildings, and storage facilities. The farming child may start working for his or her parents through high school and maybe college. Eventually the farmer will be ready to retire and the farming child will be ready to take over operations of the family farm. Because the farmer’s most valuable asset is the land and a majority of the remaining assets are farm-related, where does the remaining three children’s inheritance come from?
Setting up your estate plan early can help address that concern. Many parents want to treat their children equally in life and death. When a farmer lets one or more of the children use the farmer’s assets to take over the family farm, it can create an unequal benefit relative to the non-farming children. Other factors, such as tax consequences and medicaid planning, also play an important role in determining the most effective estate plan; it may be in the farmer’s best interest to transfer the land to children or hold the land and collect rent. Fortunately, there are several different ways a farmer can keep assets for retirement, transfer assets to the child who wants to take over the family farm, and provide for any children who are not farming. Whether it is renting out the farmland to help the farmer through retirement, forming a separate entity and providing equal shares to your children during the farmer’s lifetime, dividing the farmland equally between the children to rent to their sibling(s) to farm after the farmer passes away, placing the land in trust for the benefit of all the children, or any combination of these, there are numerous options farmers have at their disposal.
Because of the various gift, estate, income, and capital gains tax issues, it is important to talk to a qualified estate planner to decide which option is best for your individual situation. You will also need someone to aid in the transfer of these farm assets, whether through a will, trust, outright gift, or by forming a separate entity. Planning your estate is a difficult thing to think about, but it is much better to have a plan in place early than to leave what you have worked so hard to build in limbo after you pass away.
*The information provided in this letter is of a general nature and should not be acted upon without prior discussion with your Ohnstad Twichell, P.C., attorney.