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By Amanda Smith

Family farms are dynamic creatures, and their perpetuation requires extreme care.  Nothing is stable or stagnant, and creating a plan for the future requires careful consideration.  Many farm owners have created plans, or intended to, without attentiveness and intentionality.  The result is often financial devastation and family dissention.  Addressed here are some of the most common mistakes to avoid when planning for the continued legacy of your family farm.

Assuming you have “nothing but time”

Common Mistakes in Farm Succession & Estate Planning national ag day 2015

The assumption that you have time to plan for transferring your family farm into new hands is possibly the greatest gamble you can play with your operation.  There are endless stories of family farms who were divided and destroyed by the untimely death of the farm operator, and countless other farms that have landed in the laps of sons and daughters who are too young and inexperienced to successfully manage on their own.

Keeping it close to the vest

“He left his fortune to some guy he barely knew” might make for a great line in a country song, but it’s probably not the legacy you want to leave with your family farm.  There may be nothing more frustrating for a potential farm heir that to be told “there is a plan, and you don’t need to worry about it.”  Such comments can often times leave said heir assuming that either a plan doesn’t actually exist, or they are not a part of it.

Communication is critical in succession planning, and the time for such communication to happen is not in an attorney’s office in the weeks following a funeral.  Keeping it a mystery is a mistake.  All potential heirs and managers need to fully understand the plan for succession, and how the distribution of assets will occur. In the best case scenario, they are a part of creating the plan.  Security comes in knowing what lies ahead for the future, and choices for heirs and their families become much easier when they are certain about their future.

Distribution of Assets is bigger than “Put your name on that”

My grandmother used to keep a roll of masking tape and a Sharpie marker in the junk drawer, specifically for the task of marking items in her home to go to certain kids and grandkids.  Much to no one’s surprise, that method was highly ineffective and haphazardly respected when it came time to gather our treasures.  Great dissention existed over a few antiques and several collections of dishware.

Common Mistakes in Farm Succession & Estate Planning photodune 417290 farmer walking toward combine xs

Family farms are storehouses of treasures, from Grandpa’s first tractor to Grandma’s favorite apron.  They tell the story of our generations, and they create grudges and heartaches that last for years when not divided with intentionality and legal backup.  Antiques and heirlooms are small beans next to the physical assets of a modern family farm.  It is not enough to make a list of your land and equipment, and trust it to the family to honor your wishes in dividing it.  Legally binding plans for distribution of assets protect your wishes, your legacy, and your surviving family’s relationships.

Assuming death is the only possibility for necessary succession

Agriculture remains one of the most hazardous occupations, with a very high incidence of death and disability as a result of accidents.  According to the Center for Disease Control (CDC), 100 workers are injured in farm-related accidents every day.  The rate of death is 21.4 out of every 100,000 workers, an incredibly high statistic.  Therefore, not only are agriculture accidents prevalent, they are also often very serious.  Not only do farm deaths and disabilities occur due to accidents, but they can also be caused by stress, pesticide exposure, extended term hearing loss, and other health-related issues.

In previous articles, we indicated that succession and estate plans need to include provisions for the transfer of management to occur before the current generation in unable to physically and/or legally make decisions.  If the current manager becomes incapacitated in such a way that they are not competent to lead, or at least sign over that responsibility to another person, everything remains at a standstill until the legal process can be completed.  If such a pause happens during a time when business decisions need to be made, catastrophic financial consequences can result from the delay.

In a future article, we will discuss how farm safety and farm accidents can be reduced in all sizes and types of agriculture enterprises.  Look for that in the coming weeks!

Failing to address the dynamics of your family

It should be somewhat obvious that not all farm families have the same personal dynamics, and therefore not all succession plans can be cookie-cutter simple.  In both the transfer of management and the distribution of assets, various family dynamics should be considered.  Here are a few:

Blended families require binding inheritance plans – if all of your assets are left to your surviving spouse, and the asset distribution beyond the spouses death is not clearly defined in a legally binding form, it is entirely possible that said spouse could alter your wishes in terms of asset distribution…leaving your children without the inheritance you intended.

Naming an executor or manager is bigger than “The one that is always there” – The child who stays home to be a part of the family farming operation may or may not be the best choice for its management in the future. Consideration has to be made regarding who has the best management abilities, experience, and intentions relative to your operation.  In the first article in this series we discussed how to navigate fair vs. equal, and in the second we looked at business structures that allow for varying types of succession planning and asset allocation.

Providing for family members who are disabled – In the case of disabled children, and even disabled or elderly parents who need continued care, provisions need to be made for asset allocation and medical power of attorney to support them.

It takes money to die

While the net worth of a family farm may be very large, often times the cash on hand and even highly-liquid assets can be very small.  If you have a non-farm heir and the plan is to provide them with cash upon your death, such a provision needs to be made for that.  Many times the obvious and simplest answer to this may be a life insurance policy.  However, you may choose to provide assets in other forms that do not damage the integrity and sustainability of the operation.  Making sure that ownership of assets is in proper order, so that timely sales can be completed, is also important to consider.  A well-defined succession plan is only effective if the assets can be accessed to follow it through.

Filing the estate plan, and forgetting it

The estate planning process is never meant to look like a round of calf-roping.  You don’t take off out of the chute, focusing on nothing but tackling and conquering the final document, and then throw your hands in the air and walk away when it is accomplished.  It is not a final destination.

A much more effective illustration is that of an artist’s great masterpiece.  If the family farm you pass on to your children is the greatest work of your lifetime, don’t you want it to be protected and handled with care?  A succession plan is the written documentation of the family farm and all that it entails, including the physical and human capital.

Da Vinci and Michelangelo often spent years creating a masterpiece in physical form, and many decades before that developing a vision for the great work.    The maintenance on these wonders continues still today.  A succession plan document is a work in progress, and requires maintenance even after the final draft.  Plans should be revisited upon all of these occasions, and more:

The simple conclusion is that estate and succession plans can accelerate a smooth transition of your farm from one generation to the next, and the lack of such a plan can destroy a family’s farming legacy.  There really is no reason or valid excuse to delay the process, and a well-organized team effort is key to an effective plan.  This is not something to tackle on your own, but instead with a team of legal, financial and family constituents who have a vested interest in your family farm.

The first step is always the hardest, but can be as simple as a family meeting to discuss the vision for your farm’s future.  It may not be an easy conversation, but a necessary one to prevent your family farm legacy from becoming one of a failed operation, or worse even, that of a family torn apart.

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by Amanda Smith

“I shall never use profanity except in discussing house rent and taxes.”
-Mark Twain

If Mark Twain were a farmer today, he might change that statement to “cash rent and taxes”, but nonetheless, nothing stirs up profanity at the coffee shop like taxation.  When considering taxation relative to succession and estate planning, two key topics need to be addressed, capital gains tax and estate tax.  Both can influence the portion of your net worth that survives your death. In Part 1 of this series we discussed “fair vs. equal” and this article on taxes might be seen as an extension of that.

Capital Gains & Estate Taxes Giving Uncle Sam less than his “Fair Share” pinch your pennies farming

Selling a farm means giving strong consideration to the potential tax consequences

Although recent changes in the tax law that may influence the propensity with which you reduce income tax through charitable donation, you may choose to benefit charities of choice as an alternative to sharing a larger portion of your estate with Uncle Sam.  We will briefly take a look at implication of capital gains and estate tax.  In Part 2 of this series on Farm Business Structures we’ve outlined several ways to set up the farm for estate planning and these structures may or may not affect capital gains farm taxes. Please remember that this is information only, subject to changes in tax legislation, and should not be a substitute for consulting your estate planning team of professionals.

Capital Gains Tax on Farms

“A person doesn’t know how much he has to be thankful for, until he has to pay taxes on it.”
-Anonymous

Owning property, caring for it well, and leaving it as a legacy for the next generation, might be the greatest source of pride for any farmer, or any American for that matter.  Unfortunately, the greater the appreciated value of property over time, the more you are likely to pay in capital gains tax.  Capital gains is calculated based on the net sale proceeds minus the owner’s basis in a property.  If a property is held beyond a year, capital gains are taxed at a rate of 15% or 20%, in addition to any applicable state taxes.

Reducing capital gains taxes becomes a decision between several options, highlighted below:

Creating a charitable trust provides a lifetime fixed or variable income to the current generation owners. No capital gains are realized when assets like land and equipment are contributed to a charitable “remainder” trust.

At death, a charitable trust to the heirs provides them a lifetime of fixed or variable income. No capital gains are realized, and upon the death of the heirs the assets are distributed to a charitable organization for the purposes desired by the original owners.

In the case of no heirs, where the current owners want to continue to earn income from the operation, and then pass it to a charitable organization at death, property may be deeded to the organization effective upon the owner’s death. This results in a nice income tax deduction for the landowner for the value of the charitable organizations right to own the property, and allows ownership and operation rights for their lifetime.  For the duration of their lifetime they are entitled to all income from the property, and also continue to be responsible for taxes, insurance, maintenance and other operating costs.

In this option, the owner gifts farmland to a charitable organization during their lifetime or at death. No capital or estate taxes would be due with this gift.

If or when the heirs sell the asset, their capital gain realized will be limited to the change in value from the time they inherited the property until the time of sale.

Estate Tax

“A fine is a tax for doing something wrong. A tax is a fine for doing something right.”
-Anonymous

Transferring farm assets from one generation to the next, no matter if it’s during the owner’s lifetime, or upon their death, can be somewhat of a moving target when it comes to tax liability. To better understand how estate tax is defined and calculated, visit this article from Iowa State Extension. (Note: The figures have not been updated to reflect legislative changes in estate tax in 2018) Previous legislation held the limit of transfer without incurring estate tax to $5.49 million, in addition to unlimited transfer to spouses and/or charity.

Current federal legislation, in effect from 2018 through 2025, raised the limits of asset transfer to $11.2 million.  This is in addition to unlimited transfers to spouses and/or charitable organizations.  If you happen to have more than that to be thankful for, or plan to live beyond 2025 or the next Presidential administration change, you will want to pay close attention to legislation changes.

Keeping an accurate balance sheet that reflects current and expected fair market value is key to avoiding estate tax.  Because of the per unit value of not only farmland, but also other farm assets such as equipment, buildings, etc. the value of an estate can approach the $11.2 million per person limit rather quickly.  This is a figure you want to take seriously.  You will want to revisit your estate plan as you acquire assets to make certain you have not reached a threshold which might trigger estate taxes.

“Death and taxes may be inevitable, but they shouldn’t be related.”
-J.C. Watts

In the final article of this series, we will take a look at common mistakes in the estate and succession planning process, and explore a few tools that can be utilized to overcome hurdles when balancing fair and equal regarding heirs.

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Selling the farm is a complex decision. Financial, legal and emotional concerns are a just a few of the important details that surround these large transactions, none of which are to be taken lightly.

After years of strong gains in the price per acre of agricultural farmland, many agree the peak occurred some time around late 2013 and into the spring of 2014. Since this time, the price per acre for agricultural land has seen, for the most part, some softening. Whether you are planning for retirement, have inherited the family farm or are simply looking to cash in on paper profits, there are several ways to sell a farm, including the installment sale. While many people prefer an outright sale with cash at closing, there are some tax benefits associated with installment sales that are certainly worth exploring. The challenging part is finding the right buyer who would finance the deal with a downpayment and contract, but at Geswein Farm & Land Realty, we belive in win-win scenarios.

An installment sale provides some flexibility to spread the capital gains liability out over several years. The end result allows for better tax planning methods and strategies.

The interest earned from a Promissory Note on the farmland installment sale could be higher than the net cash rent income produced by leasing the farmland.

After an installment sale, the only thing the seller has to focus on is collecting monthly interest payment. No longer will you need to manage the farm, renew farm leases, or maintain the property.

When penciling the math with your accountant, the value of a well-performing Promissory Note with interest can be greater the value of the farm real estate, particularly lower quality farmland.

Sellers: Family with several relatives that has inherited the Indiana farmland

Acres: 80 acre farm

Purchase / Sale Price: $750,000

How the Closing Works 

Getting Paid

The closing of an installment is very much a traditional farmland sale. The closing takes place through a reputable Title Company under what is commonly referred to as an “insured closing.” The costs associated with the closing are standard with the Seller and Buyer splitting the “closing costs” evenly.

Down Payment

  • $150,000 paid at closing to the Sellers
  • Promissory Note Original Amount: $600,000

Promissory Note Terms: Interest Rate of 4%. Interest to be paid annually on each anniversary date of the Promissory Note along with a $120,000 principal payment. Promissory note would be paid in full over a 5 year period. Promissory Note would mature in full 5 years from the date of the note.

Prepayment Penalty: 2% during the 5 year term of the Promissory Note, with the provision that with the death of the last spouse, the note could be prepaid in full with no penalty.

Collateral: The Promissory Note would be fully secured with a  1st Security interest in the total acres of the farm (in this example, 80 acres of farmland) being sold/purchased. The original Promissory Note amount would be 80% of the purchase price, giving the Seller(s) their Promissory Note properly secured with a  20% equity/cushion. After the first anniversary principal payment is made, the equity/cusion increses to 36%.

Escrow Agent/Holding of Funds: A very reputable Trust Department of a local, regional, or national bank with an office in Indiana would be utilized to handle the details of the paperwork and transaction. The Seller(s) and Buyer(s) would split the annual fee for the Escrow Agent on a 50/50 basis.

Documentation for Closing:

  1. A Warranty Deed for ownership of the 80 acres would be given from the Seller(s) to Buyer(s)
  2. A 1st Mortgage in favor of the Seller(s) in the amount of $600,000 would be executed by the Buyer(s)
  3. A Release of Mortgage would be executed by the Seller(s)
  4. The $600,000 Promissory Note in favor of the Seller would be executed by Purchaser
  5. An Escrow Agreement would be executed by: The Seller(s); The Buyer(s); and the Escrow Agent. The Escrow Agreement would clearly outline the responsibilities and duties of all parties involved.

 After Closing Details:

Shortly after closing, a reputable title insurance company (e.g. Chicago Title Company), an Owner’s Policy of Title Insurance would be issued in favor of the Buyer(s) for $750,000 and a Lender’s Policy of Title Insurance would be issued in favor of the Seller for the $600,000 Mortgage.

The Promissory Note, the Mortgage, and the Release of Mortgage would remain in the control and possession of the Escrow Agent until the Promissory Note is paid in full. Once the Promissory Note is paid in full, the Escrow Agent would mark the Promissory Note “PAID” and the Escrow Agent would the immediately record the Release of Mortgage at the local County Recorder of Deeds office. Once the documents are properly recorded, then the installment sale of farmland will have been deemed fully satisfied and the responsibilities of the Escrow Agent will end at that time.

How are Annual Payments Made to Seller(s)

The Annual principal and interest payments would be paid from the Buyer(s) to the Escrow Agent. The Escrow Agent would then in turn distribute these payments to the Seller(s). The Seller(s) would be responsible for advising the Escrow Agent of any change in status of the beneficiaries of the Promissory Note and to certify to the Escrow Agent as to whom should receive the annual principal and interest payments going forward and at what address or addresses.

Commission Fees / Broker Fees

It is important to remember that the fees paid to the real estate broker are due and paid in the full at the time of the closing. Regardless of the timing of the installment sale and payments to the seller, the entire commission must be paid at closing. Generally speaking these fees vary based on total number of acres and the size of the real estate transaction.

While this is merely one potential method for selling a farm, it’s certainly not for everyone. Keep in mind that fees paid to the land broker or real estate agent must still be paid in full and are not spread out over the course of the installment sale. More often than not, this technique for selling a farm only comes into play during very limited circumstances.

At Geswein Farm and Land, we believe in creating win-win scenarios for our clients and when necessary, explore alternative options for the sale of a farm.

The information presented here is not to be construed as legal advice. Consult your tax advisor prior to making any decisions for an installment sale of farmland. Geswein Farm & Land Realty, LLC and its agents cannot be held liable on any matters related to an installment sale.

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2015 Warren County Sales Report  Warren County Indiana Farmland Values 2015 2015 Warren County Sales Report Q3

The price per acre of top quality farmland in Warren County, Indiana held strong from January 2015 through August 2015. With 5 farms selling during that time period of Q1 – Q3, there were both private sales, public farmland auctions and listed real estate exchanging hands.

One of the largest farms (total acres) was sold at public auction with a price of ~$8,500 per acre. During the same time period, the highest price per acre was $11,000 per acre.

As commodity markets continue to remain low for the time being, Location and Soil productivity or WAPI remain the big drivers in the price per acre. Lower quality farm real estate seems to have softened in value with a change of ~1 – 5% downward. With interest rates remaining attractive, there are still several buyers looking to expand farm operation and farmland investment real estate portfolios.

Opportunities for Buyers

The current market for farms in Warren, County is strong, but offers little inventory or farms for sale at the moment. At the moment, when farms do become available they are often sold very quickly as many buyers are ready, willing and able to purchase farmland in today’s market.

Opportunities for Sellers

With very few farms for sale in Warren County, a strong opportunity exists to sell farms quickly and at a very fair price per acre. Whether your needs are financial, retirement or legal, right now is a great time to market and sell farms in Warren County.

 

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Farmland owners and family farm trustees or heirs ask us this question all the time, “When should I sell the farm?” The answer depends on your circumstances, your needs and your goals. Just as every farm is different, whether an investment or family farm so is the method of sale and the reasons for sale. All said, here is why it’s a good time to list and sell a farm with us today:

Record High Prices & Land Sales
We remain in a period of record high land sales and prices. Farmland value has appreciated significantly over the last 10 years and prices today are considerably higher than they were then. What would you do with these profits?

Access to Capital
Whether you need to put dollars into other investments or would like capital to expand other areas of your farm operation such as tile systems and drainage, equipment and implements or grain storage – we remain in a period of record high land prices compared to 10 years ago.

Estate Planning
Transitional time periods in our lives lead many people down the road of estate planning. Whether it’s a will, trust or estate, everyone should be concerned with proper planning. If you are in estate planning mode, selling the farm land is part of the equation. Creating a plan today is one of the finest compliments you can give to your family.

Retirement Expenses
From taxes and health-care to other important ‘golden years’-issues, the sale of farmland in today’s market can provide the financial freedom to remove stress and worry from these expenses. What else could you enjoy during retirement with this capital?

Plenty of Buyers / Strong Demand
Today’s market includes a wide range of buyers in a great cash position. From the neighboring farm operations to our network of land investors, we are selling farms as soon as we have them listed for sale – netting you the highest returns possible in today’s farm real estate market. Backup offers are quite common in this market as ready, willing and able buyers compete for a chance to buy farmland.

What else could you be doing with your money? The answer to this question helps determine the route forward. Whether you plan to travel, retire or invest in other areas of interest – we believe that your needs, goals and objectives always come first. Whether your concerns are financial, legal or otherwise, selling the farm in today’s real estate market is a choice that starts with a conversation.

For more information Call or Text 765-427-1619

About the Author

Johnny Klemme Farm Land Broker, Helping investors with buyer's representation  When is a good time to sell farmland? Johnny Klemme Land Broker Farm Real Estate Indiana

Johnny Klemme is a published author, graduate of Purdue University & Professional Land Broker specializing in farm ground in West Central Indiana. Skilled at farmland marketing to local, regional and national buyers, Johnny helps families, heirs and trustees sell farms in Indiana.

Commited to helping you achieve the highest returns

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Selling your farmland may be one of the most difficult decisions you make. Whether it is the family farm passed down through generations or land that you have improved through hard work and investment of capital, the sale of your farm is not always cut and dry.

Economics & Fundamentals of Farming

Land values, like corn and soybean prices, fluctuate based on economics. Typically, when optimism about the grain markets and expected returns are high, land prices tend to increase. Today, demand remains strong for the purchase of land; however, commodity prices and future return expectations are much lower. This said many buyers are in a strong cash position to purchase your land as soon as we list it on the market.

Timing of Your Listing

Much can be said about the timing of putting a farm for sale on the market, but historically, more buyers are looking at land that is for sale when they are not busy with other work. Buyers often prefer to take possession of a farm before the next crop season and many sellers enjoy ending the calendar year with a sale and cash at closing. Farms can be sold during every season, but when the “for sale” sign goes up, you’ve established control of the market and are not leaving it up to chance.

What is my farm really worth?

The basics of farm land values boil down to four criteria: 1) Location 2) Rainfall/Precipitation 3) Soil 4) Drainage. Additionally, knowing as much as possible from the sales over the last few years are the foundation for getting the most net dollars. Remember, not all farms are created equal. Differences in size, shape, economics and the basic four criteria of farmland affect value. Understanding the basics and consulting a land broker will give you the confidence to sell and achieve your goal for a well-deserved profit.

Tax Strategies

Planning ahead for tax implications such as capital gains is vital to maximizing your net return on the sale of farmland. There are other tax reduction vehicles (trusts, TOD, charitable remainder trusts, etc) that could be beneficial depending on your unique financial position. Work with a knowledgeable land broker and estate planning expert to navigate your options.

How to Sell Farmland for the Highest Return best time to sell farmland 2015 2016

Farm Real Estate Indiana  How to Sell Farmland for the Highest Return Johnny Klemme Land Broker Farm Real Estate Indiana

About the Author

Johnny Klemme is a published author, graduate of Purdue University and Land Broker specializing in farms & land in West Central Indiana. Born and raised on a local farm, his commentary on issues important to the farming community and land values can be found at www.PrairieFarmland.com/blog

Committed to helping you achieve the highest returns
As the leading experts in farmland and wooded property sales & auctions, we provide a complete range of services in the acquisition and sale of your unique land and agricultural investments.

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