Family-owned farms are more than just a business. They are a source of pride and connection as well as income. Unfortunately, in recent years it has been harder and harder for family farms to keep afloat. Many family farmers are so busy with the day-to-day work of managing the farm that they put off planning for the future—both theirs, and that of the family business. But family farms need asset protection as much as, if not more than, other businesses.
If you are planning to pass your family farm on to the next generation, you need to take steps to preserve this asset which is worth so much to your family. Without doing so, an accident, emergency, or the cost of long-term care you may someday need could require you to liquidate the farm. You could lose all that you have worked for, and your children could lose their family legacy, as well as a source of income.
Fortunately, with a bit of advance planning, you can achieve asset protection for your family farm, as well as a number of other benefits. Using limited liability companies (LLC) to organize your farm business allows you to safeguard assets while also limiting your personal liability, minimizing your estate taxes, and passing your farm on to the next generation with less disruption.
What exactly is an LLC? It's a business structure that is something of a hybrid between a sole proprietorship or partnership and a corporation. Like a sole proprietorship, an LLC offers pass-through taxation; like a corporation, it limits the personal liability of the owners—hence the name.
It is recommended to form two LLCs as sister companies. One LLC is a holding company which owns the assets of the farm business. The other LLC serves as an operating company for the farm business, and leases the assets from the holding company. Meanwhile, you remain in charge of decisions regarding the farm just as always, until you decide to turn over the reins to someone else.
An LLC also allows you to gift ownership interests gradually to your children, reducing your future estate and minimizing estate taxes. If some of your children are interested in running the farm and others are not, those who are not can sell their interests to those who are.
Owners of the LLC are protected legally in the event of a lawsuit against the farm, such as a personal injury action. They are also insulated during the sale of any farm assets. For added protection, the LLCs can in turn be owned by an Ohio Legacy Trust.
A minority of states, of which Ohio is one, permit the use of legacy trusts. An Ohio Legacy Trust (OLT) is an estate planning tool that is especially helpful to business owners and individuals with significant assets. A properly-drafted OLT protects assets in the trust from creditor reach under most circumstances, so it's critical to have an experienced Ohio estate planning attorney draft one to contain the LLCs which own and operate your farm.
Things to be aware of when forming a Ohio Legacy Trust: it is irrevocable, meaning that you cannot take assets out at will. Also, it does not protect farm assets against current creditors, only future ones.
If you own a farm, the cost of putting in place an asset protection plan is much less than what you could lose by failing to do so. Contact an Ohio estate planning attorney, preferably one with experience in planning for family farms, right away.
To learn more about planning for your family farm: