For farming families, the farm is a major asset and a source of income; a legacy from previous generations, and an inheritance for future ones. But many families fail to put in place adequate farm succession planning and asset protection, which can jeopardize the future of a family farm.
Estate planning for a farm poses unique challenges. Unlike some family businesses, family farms aren’t mobile, and much of the value of the farm lies in the real estate. That can make it especially difficult to divide the value of the farm among heirs who will continue farming (on-farm heirs) and those who will not (off-farm) heirs. In addition, there is often an emotional attachment to the land of a family farm, posing complications if there are no heirs willing to continue farming.
Running a farm is hard work, and many days there’s not much time left for anything else. But farmers must make time to evaluate their goals for the future of their family, and of the family farm. Many farms do not survive the transition from one generation to another, and lack of planning is often a major contributing factor. Families need to identify succession planning goals and sit down with an experienced farm planning attorney to put a practical, viable plan together.
Perhaps more than most estate planning, farm succession planning needs to be customized to the circumstances and goals of each family, and there are often many competing considerations. Does the farm currently have one owner, or multiple owners? What are the owners’ intentions for the future of the farm — will the next generation continue to operate it, or will it be sold on the owners’ death or retirement? If the next generation will continue to farm on the land, are there family members who will not be farming? If so, what needs to be done to ensure that they receive a fair inheritance?
In short, the steps you need to take depend heavily on what you hope to achieve. If you expect the next generation to continue farming, you will need to find a way to transition not only assets, but responsibility for the business, to your heirs.
Regardless of your intentions for the future of your family farm, you also need to remain mindful of protecting farm assets, which are vulnerable on a number of fronts: judgment creditors, loss in a family member’s divorce, and even the need for sale to pay for nursing home costs.
There are a number of estate planning strategies available for family farm succession. Most of them involve the creation of a trust, limited liability companies, or both. The owner of the farm can transfer it to an irrevocable trust rather than distributing it directly to heirs upon the owner’s death. Creating a trust allows the owner to exercise greater control over the disposition of the land and its use. An irrevocable trust such as an Ohio Legacy Trust protects farm assets from future creditors, preserving them for trust beneficiaries.
If there are at least some off-farm heirs, it may make sense to create a trust to lease the property. If there is an on-farm heir, farm owners can create a trust of which all heirs are beneficiaries. The trust can allow the on-farm heir to lease the farm for agricultural purposes. The creator of the trust can even choose to allow the on-farm heir to use the land on a rent-free basis if they wish.
What if there are no on-farm heirs, but the farm owners want the farm to continue? The owners can still put the farm in the trust, and direct the trustee to lease the land to a third party for agricultural purposes. In such a situation, the third party would pay rent to the trust, and the off-farm heirs would receive distributions of rental income.
One benefit of creating an irrevocable trust to own the family farm is that the terms of the trust can restrict the use or sale of the land, at least for an extended period of time. For instance, a trust can specify that the land is only to be used for agricultural purposes. If keeping the farm in the family is important to the current owners, restricting the sale of the land for a period of time through the trust can help achieve that goal. Even if none of the owners’ children want to farm, for instance, perhaps a future grandchild will.
Farm owners can also transfer farm assets, including land, to a limited liability company (LLC). Heirs could be members of the LLC, with voting and non-voting interests depending on the members’ active involvement in the farm. The LLC’s governing document, called an operating agreement, creates a management structure for the organization and can, among other things, restrict members from transferring their ownership interest in the LLC to a third party. In addition, an LLC, as the name suggests, provides liability protection for heirs in a way that owning the farm outright would not.
You don’t need to choose between an LLC and a trust — and in fact, using both gives you an extra layer of protection. When the farm is owned by an LLC, rather than you or your heirs, it is protected from many types of lawsuits and debts, including nursing home expenses. When the LLC itself is owned by an irrevocable trust such as an Ohio Legacy Trust, you are assured further debt protection for your family farm. In addition, if the farm is owned by an LLC which is itself the property of an irrevocable trust, it is removed from your estate. That means the size of your estate is reduced, along with the likelihood that your estate will be subject to estate tax.
These planning tools are only effective if properly drafted and implemented, so be sure to work with an attorney who is experienced in estate planning and succession planning for family farms. To learn about the best way to provide your farm with asset protection and preserve it for the next generation, please contact Gudorf Law Group to schedule a consultation.