Farm Transition Planning Conference Planned for August

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/cultivatingconnections or 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.

New Bulletin Available: The Charitable Remainder Trust Strategy for Retiring Farmers

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:

1. Assemble a team of advisors and develop a CRT strategy.
2. Donor establishes a CRT.  The trust document declares the income beneficiaries and the charitable beneficiaries. 
3. Donor determines the assets to be contributed to the CRT.
4. Donor contributes assets into the CRT, typically grain, machinery and/or livestock.
5. The CRT sells the assets but does not pay tax.
6. 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.
7. The annuity pays out to the Donor over a number of years.  The Donor pays income tax on the annuity distributions.
8. 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.

For a detailed discussion of CRTs, including advantages and disadvantages, see the new publication Charitable Remainder Trusts as a Retirement Strategy for Farmers available on farmoffice.osu.edu.

Transferring Farm Operating Assets at Retirement

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.

For a detailed discussion of the CRT strategy, see the Charitable Remainder Trusts as a Retirement Strategy for Farmers bulletin available at farmoffice.osu.edu.

Conclusion

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.

For more information on these strategies, see the Strategies for Transferring Farm Operating Assets bulletin available at farmoffice.osu.edu.

Gifting May Help Estate Taxes

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.

Farm Transition Planning Strategies for Second Marriages – Part 2, Divorce

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.

For more information on farm transition strategies to address second marriage issues, see the new bulletin FARM TRANSITION PLANNING STRATEGIES FOR SECOND MARRIAGES available at farmoffice.osu.edu.

Farm Transition Strategies for Second Marriage – Part 1, Trusts

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.

Is your farm business ready for your death?

Written by David L. Marrison, Professor & Field Specialist in Farm Management, OSU Extension

“I guess it comes down to a simple choice, really. Get busy living or get busy dying.” This famous line was quoted by Andy Dufresne, played by Tim Robbins, in the iconic movie titled “The Shawshank Redemption” released in 1994.

As we each traverse through our lives, we all are presented with moments that make us pause and reflect on how precious the time is we have been given here on earth. Every time I watch The Shawshank Redemption, I pause and think of the deeper message in this line:  that life can be spent going through the motions and waiting around for something to happen or you can make something happen.

As we look at developing a plan for transitioning the farm to the next generation, are we waiting around for something to happen? Or will we work to make something happen? As farmers, we have to contend with and solve the day-to-day problems which arise on the farm. And there is never a shortage of problems that arise. Because of this, the time for deeper planning functions such as farm transition planning is often pushed down the to-do list.  So, what will be the trigger to make something happen with regards to your succession plan?

What will be your trigger?

One of the hypothetical questions we pose in farm succession workshops is, “What knowledge would you need to pass on if you knew you had only two months to live?” This exact scenario happened to our family in 2010 when my father was diagnosed with pancreatic cancer just as we entered into Spring planting season on our dairy farm in northeast Ohio. 

My father valiantly battled this disease but passed away seven weeks later. Our family learned a lot and had to scramble to manage the farm in the midst of his illness. I am grateful for the short time we had with my dad to make preparations. But it was not long enough to learn everything we needed to know to run the farm without him.

I challenge you to think how your farm and family would react to the loss of the principal operator.  What knowledge and skills need to be transferred to the next generation so they can be successful without you? What can you do today to make something happen?

Who Will Manage the Farm in the Future?

As you develop your succession or transition plan, there are a myriad of decisions to be made. These decisions include identifying the next leader/manager of the farm, how to be fair to off-farm heirs without jeopardizing the future of the on-farm heirs, how to distribute assets through the estate plan, how and when the senior generation will retire, and how the business will deal with unexpected issues such as divorce, disability or paying for nursing home expenses. I would contend that the most crucial planning functions are to identify the next manager of the farm and then strategically plan how to develop them to lead the farm in the future.

The first step is to identify who the next leader or leaders of the farm will be. The next generation could be an immediate family member (son, daughter, grandchild) or extended family member (brother, sister, niece, nephew). With that said, the next leader does not have to be from your family as some farms have transitioned successfully to a non-blood friend or neighbor. The key is to choose a successor who will be the best caretaker of the farm and the land they will be entrusted with.

As you review potential managers and heirs to your farm, it is important to talk with them about their vision for the future and how it aligns with the current farming operation. What are their goals and aspirations for the farm? What concerns do they have about the future of the farm? 

Complete a skills assessment with each potential heir/manager to examine their current strengths and which areas they will need to receive training in order for them to be a better leader for the farm in the future. Talk with them to learn more about what they would be most concerned or scared about if they had to take over the farm today. Are there additional responsibilities they would like to assume and what is their expectation for an appropriate time for management control to be transferred?

The new manager should have experience with how other farms are operated. Having the future manager work on another farm prior to returning to the home farm is a valuable experience. Mentor relationships should also be developed for the new manager to have a trusted team to help them grow.

Putting the Transition into Motion

The transition can be accomplished gradually by turning over more responsibility and authority to the successor.  In fact, this process may (and should) take 5-10 years. It is important to develop a timeline for transferring ownership, management responsibilities, and knowledge from one generation to the next.

As the senior generation transitions their role and responsibilities to the next generation, thought should be given to the overall labor hours which will be available. In some cases, the responsibilities of two members of the senior generation will be transitioned to a single successor. Think of husband/wife combination transitioning to one of their children. This could cause a labor shortage. Could some tasks be outsourced to independent contractors (like accountants)? Can some production practices be accomplished through custom hire arrangements (silage harvest or cattle breeding)?

The biggest task in the transition plan is making sure the next generation has a firm foundation of knowledge to manage the operation in the future. This will look different for each farm and for the type of manager that is needed.

Owner-Operator. If the next manager is going to be an owner-operator, then training will need to include how to manage all aspects of the farm. These include production skills to raise livestock and/or crop enterprises and marketing skills to effectively market each commodity produced. The owner-operator will also need financial skills to manage the operation’s finances and taxes and human resource skills to manage employees. Additionally, they will need to know how to maintain facilities, tools, and equipment as well as how to manage risk through crop, livestock, and farm insurance.

Owner-Landlord. To the contrary, if the next manager will be more of an owner-landlord, they will need to be trained less on the day-to-day production activities and more on how to manage the farm asset. Some skills which are necessary for landlords include tenant and farm rental management, farm finance and tax management, farm insurance decision making, and facilities and other farm assets maintenance.

Strategies recommended for farm businesses to utilize in the transition process are:

• Every person who is part of the business (family member and employees) should have a written job description which includes job duties, responsibilities, and expectations.
• Create an organization chart of all employees and how each employee relates to one another.
• Develop a timeline for the successor to work through each job description on the farm. It is good to start the new family member as an employee and not the top manager.
• Provide meaningful opportunities for decision-making as well as accepting responsibility for the future manager.
• Develop a plan on how the future manager can increase their equity in the farm business through gifting, purchasing or inheritance.
• Develop a timeline for retirement and managerial transfer from senior generation to the succeeding generation.
• Utilize family business meetings to discuss the transfer and changing roles within the business.

Some experts advise that the current manager take a number of planned absences before retiring to provide an opportunity for the successor to see what it is like to manage the business alone. This will also allow the current manager to see that the farm does not fall apart without them. So how do you know if the next generation is ready?  There are two other approaches which you can use to help prepare the next generation to lead without you:  

Opossum Approach. Just as an opossum plays dead, so too should the principal operator.   Take an unannounced week away from the farm during one of the busiest times of the year for your farm and allow the junior generation to take over with no communication from the senior generation.  I know this sounds crazy but how else will you know what knowledge and skills need to be transferred?  It is a lot easier to come back after a short vacation and be able to answer the questions your son or daughter has.  You won’t have this opportunity when you pass away.

365-Day Challenge. Outside of using the opossum approach, it should be the goal of the senior generation to transfer at least one knowledge point or skill to the next generation each day. So, by the end of the year, your heirs will have 365 new tools in their management toolbox. If you do this over the next five to ten years, you can teach your heirs an incredible amount.

Take Advantage of OSU Extension Workshops

Attend one of our “Planning for the Future of Your Farm” workshops this Winter to learn about the communication and legal strategies that provide solutions for dealing with farm transition needs and decision making.  A webinar version and several in-person options for the workshop are being offered.

Webinar version.  You and your family members can attend the workshop individually and online from the comfort of your homes. The four-part webinar series will be February 5, 12, 19, and 26, 2024, from 6:30 to 8:30 p.m. via Zoom. Pre-registration is required so that a packet of program materials can be mailed in advance to participating families. Electronic copies of the course materials will also be available to all participants. The registration fee is $75 per farm family.  Register by February 2, 2024 to receive course materials in time. Register on this page.

In-person workshops.  Our local Extension Educators are hosting in-person workshops at five regional locations across Ohio. Registration costs vary by location due to local sponsorships. 

• February 2, 2024 – Tiffin, Ohio – Register through this link.
• April 4, 2024 – Lebanon, Ohio – Register through this link.

More information about our Planning for the Future of Your Farm workshops is available at:go.osu.edu/farmsuccession.

Final Thoughts

So, are you ready “to make something happen” to transition your farm to the next generation?  Farm managers are encouraged to think about how the next generation can be prepared to lead the farm in the future.  And as Andy Dufresne stated in The Shawshank Redemption, “remember, hope is a good thing, maybe the best of things, and no good thing ever dies.”  Good luck as you plan for the future of your farm!

Begin planning now to use Ohio’s Beginning Farmer Tax Credit Program

Ohio’s Beginning Farmer Tax Credit Program aims to help level the playing field for beginning farmers in Ohio. It does so by providing income tax benefits for both a beginning farmer and someone who transfers farm assets to the beginning farmer.  The new program first became available for the 2023 tax year, and sunsets on January 1, 2028, or when total income tax credits granted amount to $10 million. Participating in the program requires good planning, so now is the optimal time for existing and beginning farmers to consider how best to utilize the program while program funds are still available.

Our law bulletin, Ohio’s Beginning Farmer Tax Credit Program, can help guide planning efforts.  The bulletin explains how the program works and outlines the process for qualifying for the program’s income tax credits.  That process includes:

1.  Meeting eligibility requirements to become certified by the Ohio Department of Agriculture (ODA) as a “qualified beginning farmer.”  The first step, then, is to determine whether an individual can meet the eligibility requirements, which are: 

• A resident of Ohio.
• Seeking entry to or has entered farming within the last 10 years.
• Farming or intending to farm in Ohio.
• Has a total net worth of less than $800,000 in 2021, including spouse and dependent assets, as adjusted for inflation each year.
• Provides the majority of the daily physical labor and management for the farm.
• Has adequate farming experience or knowledge in the type of farming the individual is conducting.
• Submits projected earnings statements and demonstrates profit potential.
• Demonstrates farming will be a significant source of income for the individual.
• Is not a partner, member, shareholder, or trustee of the assets the individual is seeking to purchase or rent.
• Completes an ODA-approved financial management course.

2.  Completing training and applying to ODA for certification as a “qualified beginning farmer.”  One component of attaining the program’s eligibility requirements is completing a financial management course, which an individual who meets all other program requirements must do before applying to ODA to become certified. OSU Extension offers two of the 12 ODA-approved financial management programs an individual can complete to meet the training requirement. 

• After completing an eligible financial management course, the individual must submit an application to ODA’s Office of Farmland Preservation to be approved as a qualified beginning farmer.  The application requires submitting information and documentation showing that the individual meets the eligibility requirements. 
• If ODA approves the application, the individual will receive a state income tax credit certificate for the amount paid for completing the financial management course.  The qualified beginning farmer can use the tax credit on the current year’s tax return and can carry it forward for three succeeding tax years.
• A list of eligible financial management courses and the application to become a qualified beginning farmer are on the ODA website at https://agri.ohio.gov/programs/farmland-preservation-office/Beginning-Farmer-Tax-Credit-Program.

3.  Transfer of agricultural assets to a qualified beginning farmer.  The program also creates a financial incentive for owners who sell or rent agricultural assets to an individual who has been certified as a qualified beginning farmer, as long as the beginning farmer is not a partner, member, shareholder, or trustee with the owner of the agricultural assets.  The asset owner will receive an Ohio income tax credit equal to 3.99% of the asset sale price or gross rental income received during a calendar year for a cash or share rental lease, and can carry the credit forward for up to seven years. 

• “Agricultural assets” include land in agricultural production (10 or more or if under 10 acres, earning $2500 in average annual gross income from agriculture), livestock, facilities and buildings, and machinery (but not if the owner of machinery is an equipment dealer).
• A sale of assets must occur in the same calendar year the owner applies for the tax credit.
• In the case of a rental of assets, the credit can be claimed over the first three years of the lease.

4.  Application for a tax credit by the asset owner.   To receive the 3.99% income tax credit, the asset owner must submit a Beginning Farmer Tax Credit Asset Transfer Form application to ODA. The asset owner must submit a copy of the qualified beginning farmer’s certification certificate with the application, which is available on the ODA website at https://agri.ohio.gov/programs/farmland-preservation-office/Beginning-Farmer-Tax-Credit-Program. If ODA approves the application, the Ohio Department of Taxation will issue a tax credit certificate to the asset owner.

It is important for both the beginning farmer and the agricultural asset owner to understand the process for qualifying for the income tax credits the new program offers.  Timing is critical, as the beginning farmer must complete the training and become certified as a qualified beginning farmer before a transfer of agicultural assets occurs.  It’s also important for existing asset owners to coordinate program participation with estate and transition plans.  Now is the time to consult with professional advisors and begin planning for program participation for the 2024 tax year. 

Learn more about the Beginning Farmer Tax Credit Program in our law bulletin, available in the tax law library on https://farmoffice.osu.edu/our-library/tax-law and by visiting the ODA’s website at https://agri.ohio.gov/programs/farmland-preservation-office/Beginning-Farmer-Tax-Credit-Program.

New Publication Discusses Second Marriages and Farm Transition Planning

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.

Farm Transition Planning Strategies for Second Marriages, a new bulletin available at farmoffice.osu.edu, addresses the two most common sources of risk to farming operations when a second marriage is involved – death and divorce. While these risks cannot be eliminated, there are strategies to help minimize the risks to ensure, as best we can, that farm assets stay with the farm family. The bulletin discusses the strategies and how they can be integrated into a farm transition plan.

Strategies to protect farms from the death of a second spouse mostly involves incorporating a trust in the farm transition plan.  A trust can hold assets for the surviving spouse without giving legal ownership to the spouse.  The trust serves the dual purpose of providing  income and other resources for the surviving spouse while also protecting those assets to ultimately be inherited by the deceased spouse’s heirs.  Trusts are an excellent tool to both provide for spouses and protect assets for future generations.

Prenuptial and postnuptial agreements can be used to reduce the risks of divorce.  These agreements between spouses specifically identify which assets are considered joint, marital assets and which assets are to be considered outside of the marriage.  These designations can help safeguard farm assets by keeping them immune from a division of assets in a divorce.   A recent change in the law allows spouses to enter into such an agreement even after the marriage has occurred.

Any farmers who are in a second marriage should consider including a trust and/or pre/postnuptial agreement into their farm transition plan.  An attorney experienced in farm transition planning can assist with deciding if a trust or marriage agreement is needed and how best to integrate into a farm transition plan.  The Farm Transition Planning Strategies for Second Marriages bulletin provides a detailed discussion of trusts and marriage agreements and their potential impact on farm transition planning.

New Publication Discusses Wills and Trusts

A common question regarding farm transition planning is: “should I have a will or trust for my plan?”  Like most legal questions, the answer is “it depends”.  Sometimes a will is adequate for a plan while other plans should include a trust.  Knowing which you need requires an understanding of wills and trusts and the factors that should be considered when deciding which to implement.

A new publication, Is a Will or Trust Better for Your Farm Transition Plan?, discusses the differences between wills and trusts and provides nine factors to consider when deciding which to use for your plan.  The factors to consider are:

1. Legal fees
2. Complexity of the plan
3. Probate
4. Concerns about heirs
5. Second marriages
6. Transition of farming operation
7. Taxes
8. Privacy
9. Control

The publication analyzes each factor and how it relates to a will and trust.  After reviewing the factors, an informed decision can be made regarding implementing a will or trust into a farm transition plan.  This publication is part of an extensive library of farm transition bulletins and publications available at farmoffice.osu.edu.