The Cultivating Connections Conference, an annual event dedicated to farm transition planning, is returning for its second year on August 5th and 6th, 2024. This year’s conference will be held at the University of Cincinnati College of Law and will convene farm transition planners—attorneys, accountants, educators, and other professionals—from across the country.
Cultivating Connections serves as a forum for learning, discussing, and collaborating on the latest strategies, tools, and legal and tax aspects of farm transition planning. The conference fosters a supportive community dedicated to preserving the legacy and sustainability of family farms for future generations.
Conference Highlights:
In-depth sessions and workshops: Featuring a real-life case study, the conference delves into practical farm transition planning techniques, estate planning considerations, and tax implications.
Networking opportunities: Attendees can connect with peers, share experiences, and build relationships with a network of farm transition professionals.
Expert speakers: The conference brings together a distinguished faculty of attorneys, accountants, professors, and other professionals who share their knowledge and insights.
The Association of Farm Transition Planners: This newly formed association offers ongoing support and resources for farm transition professionals beyond the conference.
Registration and More Information
For detailed information about the Cultivating Connections Conference agenda, speakers, and registration, please visit https://go.osu.edu/cultivatingconnectionsor use the QR code below. For more information or questions, contact Robert Moore (moore.301@osu.edu).
About the Cultivating Connections Conference
The Cultivating Connections Conference is a partnership between The Ohio State University Agricultural & Resource Law Program, Iowa State University Center for Agricultural Law & Taxation, and the National Agricultural Law Center.
One of the primary challenges for a retiring farmer is the large tax burden that retirement may cause. Throughout their farming careers, farmers do a good job of managing income taxes, in part, by delaying sales and prepaying expenses. This strategy works well while the farm is operating but can cause significant tax liability upon retirement. The combination of a large increase in revenue from the sale of assets and little or no expenses to offset the revenue can cause a retiring farmer to be pushed into high tax brackets. It is not unusual for 40% or more of the sale proceeds from a retirement sale to go to taxes. One strategy to reduce income tax liability at retirement is a Charitable Remainder Trust (CRT). A CRT can be an effective way of managing income taxes at retirement, but it is not for everyone.
A CRT is a charitable trust because at least some of the assets in the CRT must eventually pass to a qualified U.S. charitable organization such as a church or 501(c)(3) corporation. This charitable nature of the CRT is central to the CRT strategy. As a charitable trust, the CRT may sell assets without paying tax on the sale. So, instead of the retiring farmer selling assets in their own name, they donate the assets to the CRT and then the CRT sells the assets. The retiring farmer then receives an income stream from the CRT. After a period of time, the income stream stops and the remaining trust assets are contributed to the named charity. The following are the steps of the CRT strategy:
Assemble a team of advisors and develop a CRT strategy.
Donor establishes a CRT. The trust document declares the income beneficiaries and the charitable beneficiaries.
Donor determines the assets to be contributed to the CRT.
Donor contributes assets into the CRT, typically grain, machinery and/or livestock.
The CRT sells the assets but does not pay tax.
The Trustee of the CRT uses the sale proceeds to establish an annuity. The annuity must be designed to provide at least 10% of the sale proceeds to the charity.
The annuity pays out to the Donor over a number of years. The Donor pays income tax on the annuity distributions.
When the trust is terminated, the charity is paid the remaining assets.
CRTs are best used in situations where the retiring farmer does not have a successor and must sell all operating assets. CRTs should generally not be used when the farming operation is to be passed along to the next generation. A CRT can be an excellent strategy to help a retiring farmer reduce income tax liability and provide a charitable donation but it is not for everyone. Be sure to consult with your team of advisors before deciding upon or implementing a CRT.
Retirement means different things to different farmers. For some, retirement is the slow, gradual process of turning over the farming operation to the next generation. For others, retirement may be the immediate sale of operating assets when there is not an heir to take over the farming operation. Regardless of the type of retirement, operating assets will often be transferred. This article will discuss the different strategies to transfer operating assets and the implications of each strategy.
Strategy #1. Gifting
The gifting of assets is the simplest transfer strategy. Gifting works best when the assets are being transferred to a family member and no income is needed from the assets. While gifting may seem like the obvious best solution if transferring to a family member, there are significant negative tax implications to gifting that should be considered.
Advantages
Simple
Ownership is transferred relieving owner of liability and responsibility for repairs and maintenance
Helps next generation
Disadvantages
No income to owner
Loss of stepped-up tax basis
Strategy #2. Outright Sale
When income is needed from operating assets, a sale may be the best transfer strategy. Because many operating assets are untitled, a sale can be completed rather easily. The buyer provides the funds and the sale is completed. An outright sale is considered to be a sale that involves all assets being transferred simultaneously with a payment for the entire sale.
Advantages
Creates income
Relieves owner of liability and maintenance responsibilities
Disadvantages
Tax liability is usually significant due to little or no tax basis and depreciation recapture
Will use resources of next generation of farmer
Strategy #3. Gradual Sale
Instead of an outright sale, assets can be sold gradually, over time. Usually in this strategy, a few items are sold each year until transfer is complete. The sales can happen somewhat uniformly each year or be adjusted as the seller needs income and/or the buyer has available resources to purchase.
Advantages
May help keep seller in lower income tax brackets by spreading out income
Relatively simple
Disadvantages
Owner must wait to receive income for all assets
Owner retains some ownership and thus retains some liability and responsibility for maintenance
Strategy #4. Installment Sale
An installment sale involves the sale of the assets with payment being made over a number of years. This strategy may seem attractive as a way to sell assets and spread income over time. However, an installment sale is often the worst strategy when selling operating assets because the IRS requires all depreciation recapture taxes to be paid in the first year of the installment sale. Be sure to discuss an installment sale with your tax advisor before implementing this strategy.
Advantages
Transfers ownership immediately to eliminate liability and maintenance
After the taxes are paid in year 1, little or no taxes may be owed on the remaining payments
Disadvantages
All depreciation recapture tax is due in the first year of the installment sale
Risk of buyer not making payments
Strategy #5. Lease with Purchase Option
A lease allows payments to be spread over the term of the lease with taxes due upon receipt of each payment, rather than all due up front. The person leasing the machinery can then be given the option to purchase the machinery upon the expiration of the lease. For the retiring farmer who needs income from their machinery, this is a strategy worth exploring.
Advantages
Spreads income and tax liability over the term of the lease
May help cash flow for buyer and lease payments are a deductible expense
Disadvantages
Ownership is retained so remain liable for the asset
The “Buyer” does not own the asset so cannot use as collateral
It can be complicated to determine lease rates when machinery is traded, replaced or sold
Strategy #6. Integrating a Business Entity into the Transfer Plan
Using a business entity, such as a limited liability company (LLC) , for the transfer of operating assets can have multiple benefits. An LLC can reduce liability exposure, simplify the transfer process, and reduce tax liability. Anyone transferring operating assets should consider incorporating an LLC into the process.
Advantages
Will provide liability protection for the owner of the assets
Sale of entity ownership is usually considered a capital gain which is taxed at lower rates
Disadvantages
Can cost up to several thousand dollars to set up
Business entity requires management such as accounting, bank accounts and tax returns
Strategy #7. Charitable Remainder Trust
A Charitable Remainder Trust (CRT) can be an excellent strategy for the retiring farmer to sell operating assets without immediate tax liability, receive a long-term flow of income and make a charitable contribution. The strategy involves establishing a charitable trust, transferring operating assets to the trust, then selling the assets through the trust. Due to the charitable nature of the CRT, no tax is due upon the sale of the assets. The CRT then establishes an annuity for the retiring farmer which generates annual income. At the termination of the CRT, the remaining principal in the CRT is donated to the charitable beneficiary. The CRT strategy is the most complicated strategy and will require the most legal and accounting fees.
There are several strategies that can be implemented to transfer operating assets at retirement. There is no perfect strategy, each one has advantages and disadvantages. A thorough analysis of the implications to income, taxes, liability and cash flow of each strategy should be performed before deciding on the preferred strategy. Working with knowledgeable tax and legal counsel can help with the decision-making process and reduce the chances of unwanted or unexpected outcomes.
At some point, we have all had to find a notary to get a document notarized. Ohio law requires certain documents like deeds, long-term leases and vehicle titles to be notarized. But, have you ever thought, why do we need to have documents notarized and what are notaries? In this article, we will discuss notaries and the important role they plan in our society.
What Does an Ohio Notary Do?
An Ohio notary is an official empowered by the state to perform various acts that add an extra layer of security and credibility to legal proceedings. Their primary duties include:
Verifying Signatory Identity: A notary ensures that the person signing a document is who they claim to be. This involves either personally knowing the person or requesting valid government-issued photo identification and verifying its details.
Witnessing Signature: The notary observes the signing of the document and attests to their presence during this act. Their signature and official seal serve as evidence of this witnessing.
Administering Oaths and Affirmations: Notaries can administer oaths, which are formal declarations made under penalty of perjury, and affirmations, which are non-religious oaths. This ensures the seriousness and truthfulness of statements made during legal proceedings.
Taking Acknowledgments: An acknowledgment is a formal statement confirming that a signer understands the content of a document and willingly signed it. The notary verifies the signer’s identity, witnesses their signature, and completes a separate acknowledgment certificate.
Why Do We Need Documents Notarized?
Notarization serves several critical purposes:
Combating Fraud: By verifying identity and witnessing signatures, notaries help deter fraud by ensuring documents haven’t been forged or signed under duress. This adds a layer of security to important transactions, protecting individuals and organizations from potential scams and financial losses.
Promoting Trust: A notary’s seal signifies an independent and impartial witness to the signing process. This official recognition instills confidence in the document’s authenticity, especially when dealing with parties unfamiliar with each other.
Facilitating Legal Processes: Certain legal documents, such as deeds, powers of attorney, and sworn statements, require notarization to be considered valid in court proceedings. The notary’s presence strengthens the document’s legitimacy and streamlines the legal process.
Who Can Be an Ohio Notary?
To be a notary, a person must meet the following requirements:
Be at least 18 years old and a legal resident of Ohio, or
Be an attorney admitted to practice law in the state with a primary practice in Ohio.
Have no criminal convictions.
All new notaries are required to complete a 3-hour notary class and obtain a background check. Non-attorneys must also pass an exam.
Conclusion
Notaries play a vital role in safeguarding the integrity of legal documents and transactions within the state of Ohio. By verifying identities, witnessing signatures, and administering oaths, they contribute to a more secure and efficient legal system. If you’re interested in a rewarding role that upholds trust and protects individuals, becoming an Ohio notary public might be a perfect fit for you.
Think about your key farm advisors. You likely have regular conversations with your agronomist, veterinarian, equipment dealer, and grain buyer throughout the year. But when was the last time you spoke with your insurance agent?
For many farmers, insurance agents fall outside their regular circle of communication. This can be a risky oversight. Here’s why regular contact with your insurance agent is crucial:
Proactive Protection: Unlike other advisors you might consult reactively for problems, your insurance agent plays a preventative role. They ensure your farm has the right coverage to bounce back from unexpected events.
Customized Coverage: Farms are unique operations. A good insurance agent will understand your specific risks and tailor your policy accordingly. This could involve covering unique assets, activities, or environmental concerns.
Maximizing Coverage: Insurance policies can be complex. Regularly reviewing your policy with your agent helps ensure you understand your coverage details, including property value limits, replacement options, and liability protection levels.
Take Action Today: Schedule an Insurance Review
Here are some talking points to get the conversation started with your agent:
Policy Review: Go over your current coverage thoroughly. Are all your farm properties and assets listed accurately? Are the listed values up-to-date to reflect true replacement costs?
Coverage Gaps: Discuss any unique farm activities or assets that might require additional coverage beyond your current policy.
Liability Needs: Evaluate your current liability coverage. Is it sufficient for your operation?
An Investment in Peace of Mind
An hour or two spent with your insurance agent can make a world of difference in the event of a loss. They can be your partner in safeguarding your farm’s financial future. Don’t wait until a problem arises; take charge today and schedule a comprehensive insurance review.
Estate taxes are receiving a lot of attention due to the impending reduction in the federal estate tax exemption in 2026. If Congress does not extend or make permanent the current estate tax exemption, the exemption in 2026 will be $5.5 million per person plus inflation. The inflation-adjusted estate tax exemption for 2026 is expected to be between $7 million and $7.5 million. The current federal estate tax exemption for 2024 is $13.61 per person.
The lower federal estate tax exemption will still be high enough for most people to avoid federal estate taxes. However, some farmers will see themselves move into the federal estate tax bracket in 2026. People who will find themselves subject to estate taxes due to the 2026 sunset provisions are exploring strategies to help reduce estate tax liability.
One such strategy that may be considered is gifting. In some situations, gifting can help reduced estate taxes. In other situations, it may have little effect and have detrimental effects on income tax strategy. This article will discuss how gifting may or may not help with estate tax liability and the implications of gifting.
Annual Gifts
One gifting strategy to help reduce estate taxes is using the annual gift exclusion. As stated above, multiple gifts of up to $18,000 can be made without tax to either party. The gifts can be money, shares in a business entity, real estate or almost any other kind of asset. The annual exclusion gift can be an effective strategy for those people who have many potential recipients for the gift and/or may be close to or just over the federal estate tax exemption. Consider the following example:
Grandma has 10 grandchildren. She calculates that she will be about $200,000 over the estate tax exemption in 2026. She gifts each grandchild $18,000 in both 2024 and 2025. The gifts allow Grandma to gift a total of $360,000.
This gift allowed Grandma to move back under the estate tax exemption and avoid estate taxes. Neither Grandma nor grandchildren will pay gift taxes on the gift. As the example shows, using the annual gift exclusion can be an excellent way to reduce or eliminate estate taxes.
The primary limitation to the annual exclusion gift strategy is that it may have limited effect for people who are significantly over the federal estate tax limit. While $18,000 is not a small amount of money to gift, it may be too small to make much of an impact on estate taxes of higher wealth people. Let’s continue the previous example with a change of facts:
Grandma’s net worth will be $2,000,000 million over the exemption in 2026.
Even though Grandma can gift $180,000 each year to her grandchildren, it will take 12 years for Grandma to gift away $2,000,000. Additionally, her net worth will likely increase each year. In fact, the increase in net worth may outpace what she is able to gift each year. While annual gifting will always help reduce potential estate taxes, this strategy may only be moderately helpful for higher wealth people.
Lifetime Credit Gift
Another strategy is to make large gifts more than the $18,000 annual exclusion gift. As discussed above, large gifts can be made without paying gift tax. However, the estate tax exemption is reduced by the amount of the gift. So, making lifetime credit gifts are offset dollar-for-dollar by a reduction in the estate tax exemption. However, this strategy can still be effective when gifting assets that are expected to appreciate in value. Gifting these assets keeps the appreciation out of the Giftor’s estate. Consider the following example:
Grandma owns the Smith Farm that sits next to town. It is currently valued at $1,000,000. She expects commercial development pressure to cause the value of the Smith Farm to increase to $3,000,000 in the next few years. Grandma decides to gift the Smith Farm to their grandchildren.
Grandma can gift the Smith Farm without paying gift taxes. Her federal estate tax exemption will be reduced by $2,000,000. So, the gift itself does not help her estate tax situation. However, when the Smith Farm increases in value by $2,000,000, that appreciation in value will be assumed by the grandchildren. Grandma has essentially been able to gift $3,000,000 out of her estate while only using up $1,000,000 of her estate tax exemption.
This strategy may not be the best strategy for assets that will have no or little appreciation. For a non-appreciating asset, the gift just comes off the estate tax exemption and does not help the estate tax situation. Again, large gifts work best with appreciating assets.
Capturing the Higher Lifetime Credit
As stated previously, the current lifetime credit gifting allowance is $13.62 million which will decrease by about one-half in 2026. So, there is an opportunity to make a very large gift now and capture the large gift allowance before it is reduced. Consider the following example:
Grandma has a net worth of $20,000,000. She is concerned she will be over the estate tax exemption limit by $13,000,000 in 2026 resulting in around $5,000,000 of estate taxes. To avoid these taxes, Grandma gifts $13,620,000 of land to her grandchildren in 2024.
In this scenario, Grandma is able to gift her entire lifetime credit which reduces her estate tax exemption is to $0. But, when the estate tax exemption is reduced to $7,000,000 in 2026, there will be no claw back of her gift. That is, her estate tax exemption will remain at $0 and the IRS will not seek to recoup any of the 2024 gift exceeding $7,000,000. So, Grandma is able to gift $13,620,000 in 2024 and there is no claw back of the extra $6,620,000 in 2026 when the exemption is reduced. Grandma’s net worth is reduced to $6,380,000, which will be less than the 2026 exemption amount, and therefore Grandma has avoided all estate taxes without paying any gift taxes.
Obviously, this strategy only works for very high wealth individuals. The person must have enough assets to gift more than the full exemption amount and still have adequate assets remaining to support themselves. Most people do not have enough wealth to make this strategy work, but for those that do, it can be very effective.
Gifting Has Negative Tax Consequences
Gifting eliminates the opportunity of stepped-up basis at death. This important concept of stepped-up tax basis at death is a tremendous financial benefit to the beneficiary receiving the asset from the estate. Careful consideration should be given to this loss of stepped-up basis before a gifting strategy is implemented. For more information on gifting and stepped-up basis, see the Gifting Assets Prior to Death publication available at farmoffice.osu.edu.
Seek Legal and Tax Advice
Making gifts, particularly large gifts, have significant legal and tax consequences. Before implementing a gifting plan, be sure to consult with legal and tax advisors to explore all options and to understand the implications of different strategies. While gifting may seem like a simple solution to estate taxes, gifting is often complicated and has complex legal and tax consequences that should be carefully considered.
In the last post, we looked at strategies to deal with second marriages using trusts. In this post, we look at the risks of divorce on the farm transition plan and strategies to minimize the risk.
Marital Versus Separate Assets
To address the issue of divorce, it is first helpful to know what assets are subject to a divorce. According to Ohio law, marital assets are to be divided “equitably” in the event of a divorce. Equitable does not necessarily mean equal although an equal division of marital assets between the spouses is often the result. Divorces can be especially threatening to farmland because of the “land rich, cash poor” dilemma for farmers. In a farm divorce, it is usually not equitable for one spouse to receive all the farm assets if there are not sufficient non-farm assets for the other spouse. Thus, both spouses may receive farmland in the divorce settlement. Once the farmland is divided, either spouse can sell or transfer the land out of the family.
It is important to note that Ohio law only requires “marital” assets to be divided. Non-marital assets, referred to as “separate” assets, are retained by the spouse who brought the assets to the marriage. Understanding the difference between a separate asset and a marital asset is critical when attempting to mitigate the risks of divorce.
Separate assets include the following:
Property acquired by a spouse prior to the date of the marriage.
Passive income and appreciation from separate property received by a spouse during the marriage.
An inheritance received by a spouse during the marriage.
A gift received by a spouse during the marriage.
The above list would seem to make it an easy exercise to determine which assets are marital and which are separate in a divorce situation. However, like many legal issues, the application of the concept is more complicated than it may appear. This is because Ohio law also provides that income or appreciation on separate property can become a marital asset.
Ohio law includes as marital property:
“… all income and appreciation on separate property, due to the labor, monetary, or in-kind contribution of either or both of the spouses that occurred during the marriage. ”
So, it is possible for an asset to be partially separate (the initial property) and partially marital (the income and appreciation on the property).
Consider the following example:
Andy and Beth are farmers in the process of divorcing. Shortly after they were married, Beth inherited a 100-acre farm from her grandmother. When she inherited the farm, it was valued at $600,000. A few years after inheriting the farm, Andy and Beth’s farming operation paid for and installed $80,000 of drainage tile on the farm. The current value of the farm is $1 million.
In this example, the farm was Beth’s separate asset upon inheritance. However, the tile that improved the quality and value of the farm was a result of Andy and Beth’s joint farming operation. Andy likely has a valid claim that at least part of the $400,000 increase in value is a marital asset due to the tile installation.
Perhaps Andy further argues that most of the increase in value was due to fertilizer, tillage and other soil improvements made while Andy and Beth farmed the land. It is in Andy’s interest to make the $400,000 increase in value a marital asset. Conversely, Beth could argue that the increase was not a result of the marital farming operation but was merely a passive value increase due to market pressure. It is in Beth’s interest to argue the $400,000 increase as her separate asset.
As this example illustrates, an asset that is initially a separate asset can become, at least in part, a marital asset. Both Andy and Beth have valid arguments. It is not hard to imagine how much time and legal fees could be spent resolving or litigating the issue in a contentious divorce.
Co-mingling assets can also cause a separate asset to become a marital asset. If the spouse owning the asset voluntarily allows the other spouse to become an owner of the asset, it is likely to become a marital asset. Using the example above, after Beth receives the farm, she adds Andy’s name to the deed as co-tenant. Because she voluntarily added Andy to the deed and gave him half ownership, Beth has likely changed the property from a separate to a marital asset.
Another example might be as follows:
Beth receives a $100,000 inheritance from her grandmother. Beth deposits the money in a bank account owned by both her and Andy.
By co-mingling the inherited money with other money owned jointly with Andy, Beth has probably made the $100,000 inheritance a marital asset. If Beth would have deposited the money in an account owned only by her, the inheritance would have remained a separate asset. While co-mingling does not automatically make an asset become marital property, the spouse owning the asset should avoid co-mingling if wanting to keep the asset separate.
Assets acquired during a marriage will almost always be considered marital property. This is true even if one spouse provided little or no contribution towards the acquisition of the asset. Ohio law considers marriage to be a partnership regardless of the contribution of the spouses. For example, farmland purchased during the marriage will be a marital asset even if only one spouse operates the farm and the other spouse is not involved with the farmland or farming operation.
Prenuptial and Postnuptial Agreements
A prenuptial agreement can help alleviate the issues with marital assets. This type of agreement entered into prior to marriage designates what assets each person is bringing to the marriage, what assets will be separate, and what assets will be marital. Especially for people who have accumulated some wealth prior to marriage, a prenuptial agreement is a good option to avoid future disputes regarding the nature of assets in a marriage and potential risks to farmland.
To be valid and enforceable, a prenuptial agreement should:
Be in writing and signed by the parties;
Be prepared, reviewed and executed long before the marriage;
Provide each spouse’s assets, including values;
Be reviewed by separate attorneys representing each spouse.
Prenuptial agreements can become outdated, especially when marriages last many years. A married couple who enters into a prenuptial agreement when they are 25 may have very different assets and goals when they are 65. Until recently, married couples in Ohio were stuck with their prenuptial agreement regardless of how unfair or obsolete the agreement had become. Recently, legislation was adopted to allow for postnuptial agreements.
A postnuptial agreement is similar to a prenuptial agreement in that it identifies which assets are to remain outside of the marriage and what assets are considered joint, marital assets. A postnuptial agreement is signed sometime after marriage begins. There are no term requirements for a postnuptial agreement – it can be entered into shortly after marriage or many years after marriage.
For a prenuptial agreement to be terminated or amended or for a postnuptial agreement to valid, the law requires the following:
The agreement be in writing and signed by both spouses,
The agreement is entered into freely without fraud, duress, coercion or overreaching,
There was full disclosure, or full knowledge, and understanding of the nature, value and extent of the property of both spouses,
The terms do not promote or encourage divorce or profiteering from divorce.
For people who are considering getting remarried or for those that are already remarried, a prenuptial or postnuptial agreement should be considered. These agreements can establish how assets are to be divided in the event of a divorce and perhaps relieve some worries regarding farm transition planning. Prenuptial and postnuptial agreements should be drafted in consultation with an attorney.
Second marriages present unique challenges for farm transition planning. This is especially true when the second marriage occurs later in life and the spouses have accrued significant assets and/or have children from prior marriages. The spouses in a second marriage obviously want to help provide for each other but may have a competing interest of providing for their children but not necessarily stepchildren. Without good planning, it is possible that farm assets will end up with a spouse or stepchildren who were not involved in the farming operation.
One of the challenges with second marriages occurs when one or both spouses have children from a prior marriage. The spouses usually intend to provide adequate income to the surviving spouse upon the death of the first spouse to pass away. Also, the spouses will usually want some or all of their assets to ultimately go to their children, not their spouse’s children. So, the issue becomes, how to establish a plan to take care of the surviving spouse while ensuring the deceased spouse’s assets go to their own children?
Consider the following example, a typical second-marriage, farm transition scenario:
Mark and Mindy each have two children from previous marriages. Mark has farmed his entire adult life and built a large farming operation prior to marrying Mindy. Mindy has two children and is not involved in the farming operation. Mark’s two children plan to take over the farming operation. If Mark dies before Mindy, he wants to make sure Mindy has adequate income for the rest of her life. However, he wants his assets to be inherited by his children and not Mindy’s children.
Let’s first look at what poor planning might look like. If Mark and Mindy do not have an estate plan or a simple estate plan where everything goes to the surviving spouse then to the children, Mindy’s children could end up with some or all of Mark’s assets. In this scenario, if Mark dies first, all of his assets will go to Mindy. At that point, Mindy will have total control of the assets and could sell them all or leave them all to her children. For second marriages, no plan or a simple plan is usually not adequate to meet the goals of a farm transition plan.
The better plan is to use a trust. A trust can hold the deceased spouse’s assets for the surviving spouse’s life, thus providing income. Then, at the surviving spouse’s death, the assets are distributed to the deceased spouse’s children. The surviving spouse never has ownership of the deceased spouse’s trust assets, so the assets are never in danger of ending up with the surviving spouse’s children.
Continuing the previous example, Mark establishes a trust with the following terms:
“Upon my death, my farm assets shall be held in trust for the life of Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. Upon the death of Mindy, my Trustee shall distribute the assets to my children.”
These trust provisions will meet Mark’s goals of providing for Mindy while having his children eventually inherit his assets.
Sometimes we may want some assets to go directly to the deceased spouse’s children at death and some held in trust. This is very common for farm plans. When children will be taking over the farming operation, we may not want to tie up the operating assets in trust but instead have those go directly to the farming children. To implement this plan, the trust may have provisions similar to the following:
“Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children. The remainder of my assets, including my farmland, shall be held in trust for Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average. Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”
These trust provisions allow the farming operation to be inherited directly by Mark’s children, allowing a seamless transfer of the farming operation. The farmland is held in trust and leased by the children. The rental income from the farmland is provided to Mindy for the remainder of her life.
A third variation provides some assets outright to the children, some assets outright to the surviving spouse and some assets held in trust. This type of plan might be used when the spouses wish for some assets to go directly to the surviving spouse, without being held in trust. This is often done with cash or other financial accounts to provide immediate and freely available money to the surviving spouse. Trust provisions reflecting this type of plan may be as follows:
“Upon my death, my Trustee shall distribute all my farm machinery, grain, crops and other farm operating assets to my children. My Trustee shall distribute my First National Bank account and Acme Financial Account to Mindy, outright and free of trust. The remainder of my assets, including my farmland, shall be held in trust for Mindy. While held in trust for Mindy, my Trustee shall distribute all income to Mindy. My Trustee shall offer to lease the farmland to my children for 80% of the county cash rent average. Upon the death of Mindy, my Trustee shall distribute all remaining trust assets to my children.”
These trust provisions provide cash to Mindy for which she has immediate access and control. The farm assets continue to go directly to the children so that they can continue the farming operation and the farmland is held in trust to provide income for Mindy.
In conclusion, a trust can be designed with a great deal of flexibility and creativity. The surviving spouse can be provided with adequate income while protecting the assets for the deceased spouse’s children. A simple transition plan or no plan at all can result in some or all the deceased spouse’s assets being inherited by the surviving spouse’s children. Trusts are often an important component of a farm transition plan for second marriage scenarios.
In Part 2, we will discuss prenuptial and postnuptial agreements.
For many family farms, Long-Term Care (LTC) costs are the biggest threat to the future viability of the farm. Nursing homes can cost well over $100,000 annually and about 20% of people who require LTC will need it for five years or more. While there are no easy solutions to the LTC issue, there are strategies that can be implemented to lessen the risk of LTC on the family farming operation.
On February 20, the OSU Agricultural and Resource Law Program, PA Farm Link and the National Agricultural Law Center will be offering a webinar to discuss LTC issues for farms and the strategies available to them. Topics that will be covered include:
Costs for LTC
LTC statistics
Practical insights from an experience Care Manager who has helped families determine their LTC needs
Developing a LTC risk assessment and applying it to your specific situation
Strategies to reduce the risk of LTC costs
Reviewing the LTC risk calculator application
The webinar will be held from 7:00 – 9:00 (EST). The webinar is free but registration is required. For more information and registration, go to https://farmoffice.osu.edu/long_term_care .
Managing the inherent risks of a farm is a top priority for most farm managers. The challenge for those managers is how best to manage the risks. We often are encouraged to invest in liability insurance and/or establish a business entity such as an LLC. The question becomes: is one better than the other and do we need both?
For most legal questions, the answer is “it depends on the situation”. However, regarding farm insurance, the answer is a definite “yes, you need good liability insurance”. Farm liability insurance is the best, most cost-effective liability management strategy for a farming operation. Insurance should always be the primary risk management tool with a business entity being the backup plan. Before spending time and money on setting up a business entity, make sure the farm’s liability insurance policy has adequate coverage limits and protects all the farm’s activities and assets.
There is no precise answer as to how much liability insurance a farm should carry. For farms with higher risk exposure like customer visitors or trucks and large machinery frequenting roadways, the coverage limit should be higher. Smaller farms with less liability exposure may need a smaller coverage limit. Every farm should probably have at least $1 million in liability coverage. A coverage limit of $3 million to $5 million is probably better for farms with moderate liability exposure. Farms with high liability exposure for visitors or trucks/equipment may want $5 million or more in coverage. With liability insurance, more is better although the premium costs must be considered. Liability insurance is relatively low-cost compared to the protection it provides. The best solution is to talk to the insurance agent to determine the best coverage limits for the specific farming operation.
When discussing the liability insurance policy with the insurance agent, it is vital to make sure the agent is aware of all activities and assets on the farm. If the agent does not know about it, the activity or asset might not be covered. For example, farmers who lease their land for hunting may not be covered by a typical farm policy for injuries to hunters. To address issues like this, a checklist of unique farm activities and assets has been developed and is available here. Each activity and asset that applies to the farming operation should be checked and the completed list provided to the insurance agent. The agent can them make sure that all activities and assets are covered.
After ensuring an adequate liability insurance policy is in place, focus can then turn to a business entity. Whether a business entity is needed in addition to the insurance depends on the situation. Generally, a business entity will help provide backup liability protection if the business has any of the following:
Multiple owners;
Employees;
Many visitors;
External liability exposure such as food safety or product liability.
If none of the above factors apply to a farming operation, a business entity might have limited value for liability protection. The reason is if a liability issue occurs, the owner of the business will have caused it. The business owner will likely be personally liable regardless of what type of business entity they may have.
Consider the following examples:
Example 1. Farmer is a sole proprietor with no employees. He only occasionally receives help from family members. If a liability incident happens with machinery on the roadway, Farmer will likely to have caused it. Farmer will be personally liable. Even if Farmer had an LLC, Farmer would still be personally liable because they caused the liability incident. Farmer’s best liability protection is liability insurance.
Example 2. Farmer adds a full-time employee to help on the farming operation and continues to operate as a sole proprietor. If employee has a liability incident while driving equipment, Farmer will probably be fully liable for employee’s actions. Under Ohio law, an employer is liable for an employee’s actions during the course of work. Again, Farmer’s only protection is insurance.
Example 3. Farmer establishes an LLC for his farming operation when they hire the employee. Now, the LLC is the employer, not Farmer. When the employee has an incident driving the machinery, the LLC is liable for the employee, not Farmer. All of Farmer’s assets outside of the LLC are safe because Farmer is not personally liable. The LLC may be liable and the assets in the LLC are still at risk, but the LLC contains the employee’s liability to only the LLC.
As these examples show, the utility of a business entity to provide liability protection depends on the situation. In some cases, the business entity will provide little protection while in other cases, the entity will provide significant protection. The best course of action is to consult with an attorney to determine the best strategy for a particular situation.
The type of entity used also affects the protection provided. A general partnership provides no liability protection and a limited partnership provides some, but not complete, liability protection. An LLC or corporation are the best entities to use for liability protection. For a detailed discussion on business entities and liability protection, see the Using Business Entities to Manage Farm Liability Risk Bulletin available at farmoffice.osu.edu.
To summarize, let’s go back to the original question: do you need liability insurance, a business entity or both? There is no doubt every farm should have liability insurance. Working closely with the insurance agent to ensure that all activities and assets are covered is a goal that every farm should have. Business entities can provide a good backup plan but, in some situations, may only provide limited protection. So, it depends on the situation as to whether a business entity is needed. Consulting with an attorney is the best way to determine if a business entity is a good choice.
Ohio Agricultural Law Blog 