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!

Announcing our “Planning for the Future of Your Farm” Fall and Winter Workshops

If you and your family are grappling with the critical issue of how to transition the farm operation and farm assets to the next generation, we can help.  Attend one of our “Planning for the Future of Your Farm” workshops this fall and winter to learn about the communication and legal strategies that provide solutions for dealing with farm transition needs and decisionmaking.  We’ve scheduled both a webinar version and several in-person options for the workshop, with the first in-person workshops coming up soon–November 29, 2023 in Mt. Orab and December 7 in Celina.  

This workshop challenges farm families to actively plan for the future of the farm business.  Learn how to have crucial conversations about the future of your farm and gain a better understanding of the strategies and tools that can help you transfer your farm’s ownership, management, and assets to the next generation. We encourage parents, children, and grandchildren to attend together to develop a plan for the future of the family and farm. 

Teaching faculty for the workshop are David Marrison, OSU Extension Farm Management Field Specialist, and Robert Moore, Attorney with the OSU Agricultural & Resource Law Program. Topics David and Robert will cover in the workshop include:

• Developing goals for estate and transition planning
• Planning for the transition of control
• Planning for the unexpected
• Communication and conflict management during farm transfer
• Federal estate tax challenges
• Tools for transferring assets
• Tools for avoiding probate
• The role of wills and trusts
• Using LLCs
• Strategies for on-farm and off-farm heirs
• Strategies for protecting the farmland
• Developing your team
• Getting your affairs in order
• Selecting an attorney 

Webinar version.  You and your family members can attend the workshop individually 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.

In-person workshops.  Our local Extension Educators are hosting in-person workshops at five regional locations across Ohio:

• November 29, 2023 – Brown County – Mt. Orab
• December 7, 2023 –  Mercer County – Celina
• January 19, 2024 –  Columbiana County – Lisbon
• January 26, 2024  – Champaign County – Urbana
• February 2, 2024 – Seneca County – Tiffin
• April 4, 2024 – Warren County – Lebanon

Registration is required.  Find registration information for all workshops at https://farmoffice.osu.edu/farm-transition-planning.

We hope you’ll join us to move forward on planning for the future of your farm! For questions about the workshop, please contact David Marrison at marrison.2@osu.edu or 740-722-6073.

Moore to present Estate Planning Challenges for Farm Families this Wednesday

After many years in private law practice, OSU’s Robert Moore knows the unique estate planning challenges farm families face.  The capital-intensive nature of farming and the family legacy associated with it are just two of the many issues that contribute to those challenges.  But Moore also knows there are legal strategies that can help farm families meet their estate planning needs.

Join Moore as he reviews both the challenges of farm family estate planning and ways to address those challenges in a webinar this Wednesday at Noon.  The webinar offers a chance to learn more about topics such as dealing with on-farm and off-farm heirs, distribution plan ideas, and how trusts can benefit a farm estate plan.  The National Agricultural Law Center will host the webinar as part of its free monthly webinar series. Registration is necessary and is available online at https://nationalaglawcenter.org/webinars/estate-planning/.

The webinar represents an ongoing partnership between OSU’s Agricultural & Resource Law Program and the National Agricultural Law Center.  For eight years, the two institutions have worked together to bring agricultural law research and information to the nation’s agricultural community with support from the USDA’s National Agricultural Library.  Our agricultural law library on farmoffice.osu.edu contains many resources developed through this partnership, including recent publications on Planning for the Future of Your Farm, Keeping Farmland in the Family, and Long-Term Care and the Farm.  Those and a multitude of other agricultural law resources are also available on the National Agricultural Law Center’s website at nationalaglawcenter.org. 

If you’re not available to attend the webinar this Wednesday, find a recording of it and all other webinars in the monthly series at https://nationalaglawcenter.org/webinars.

Registration open for our Planning for the Future of Your Farm workshop

We’re happy to announce our popular “Planning for the Future of Your Farm” webinar series for 2023.  The four-part online series will be on January 23 and 30 and February 6 and 13 from 6:30 to 8:00 p.m. This workshop will help farm families learn strategies and tools for transferring farm ownership, management, and assets to the next generation.

Workshop topics

Here’s what the webinar will cover:

• Developing goals
• Planning for the transition of management
• Planning for the unexpected
• Communication and conflict management during farm transfer
• Legal tools and strategies
• Developing your team
• Getting your affairs in order
• Selecting an attorney

Workshop faculty

You and your family will learn from two of Ohio’s top farm transition experts:

• Robert Moore, Attorney with our Agricultural & Resource Law Program. If you didn’t already know, Robert was in private practice for 18 years before joining our program. He provided legal counsel to farmers and landowners across Ohio on business, farm transition, and estate planning. 
• David Marrison, OSU Extension Field Specialist in Farm Management. David has been with OSU Extension for 25 years and is nationally known for his teaching in farm succession. He has a unique ability to intertwine humor when speaking about the difficulties of passing the farm on to the next generation. 

Registration

Because of its virtual nature, you can invite your parents, children, and grandchildren to the webinar, regardless of where they live in Ohio or across the United States. The webinar offers an easy way to include all family members in learning about how to develop a plan for the future of your family farm. 

Families must pre-register for the workshop by January 16, 2023 at go.osu.edu/farmsuccession.  We appreciate the support of the Ohio Corn & Wheat Growers Association in sponsoring the workshop and helping us keep the cost at $75 per farm family. The registration includes one printed set of materials that we’ll mail to a family member, and other members will have access to electronic copies of the materials.

In-person workshops planned also

Several of our OSU Extension county educators are also hosting day-long in-person versions of the workshop on these dates:

• December 15, 2022 in Auglaize County at The Palazzo in Botkins.  Find more information here.
• January 19, 2023 in Fairfield County at the Fairfield County Agricultural Center in Lancaster.  Find more information here.

Don’t miss out

We hope you’ll join us for this important series!  Even if you already have an estate plan or have begun one, this workshop should help you learn more and ensure that you’re effectively addressing your goals for the future of your farm and farm family. 

For additional information David Marrison at marrison.2@osu.edu or 740-722-6073.

Protecting the Farm from the Risk of Long-Term Care

Long-term care costs are a threat to family farms.  In fact, we predict that long-term care costs are the biggest financial threat to farm families, even more so than federal estate taxes.  That’s because long-term care can affect every farm–and when cash or insurance runs out, farm assets may have to be sold to pay for long-term care.  With an increasing elderly population and rising health care costs, the financial pressure of long-term care on family farm succession will probably grow in future years.

What can farm families do to protect farm assets from the risk of long-term care?  Our latest publication by attorney Robert Moore, Long-Term Care and the Farm, addresses this question.  The publication begins with an important first step:  understanding long-term care risk.  What is the chance that a farmer will require long-term care, what kind of care is most common, and what how much will it cost?  Robert presents data and statistics that help us predict the expected type, length, and costs of long-term care services a farmer might require. 

Once we assess long-term care risk, the next important question is how to pay for long-term care while keeping farm assets secure.  Robert explains how Medicare and Medicaid programs can apply to long-term care costs.  He then presents several legal strategies to mitigate long-term care risk and protect farm assets.  The guide wraps up with a process a farm family can follow to assess long-term care risk for their individual situation.

It’s possible to keep family farmland and the family farm businesses safe from the risk of long-term care. If long-term care is a concern for your farm family, be sure to read this important new publication and talk with an agricultural attorney about protection strategies. The publication is available at no cost through our funding partnership with the National Agricultural Law Center and the USDA National Agricultural Library.  Read Long-Term Care and the Farm here.

New publication on Keeping Farmland in the Family

Farmland can be a family’s most important asset, recognized for both its heritage and financial value.  Here’s some proof:  over 1,900 “Century Farms” in Ohio have been in the same family for over 100 years. And 130 of those farms have been in the same family for over two centuries — testaments to the importance of farmland to Ohio families.

But there are threats that can cause farmland to leave a family despite its value to family members. Long-term care costs, divorce, debt, co- ownership rights, poor estate planning — these are situations that can put family farmland at risk. The good news is that legal strategies can counter these threats. 

In our new publication, Keeping Farmland in the Family, we offer five legal tools that can help keep farmland in a family:

• Agricultural or conservation easement
• Right of First Refusal
• Long-term lease
• Limited Liability Company
• Trust

These legal tools offer a range of protection for family farmland, allowing a family to use a highly restrictive strategy that protects land for many generations or a less restrictive approach that secures land only for a generation or two. Examples provided throughout the publication can help farm families see how different scenarios play out.  The guide does not intend to substitute for individual legal advice, but offers a family a starting point for discussion and decision making with an agricultural attorney. 

Read Keeping Farmland in the Family here.  We were able to produce this publication with financial assistance from the National Agricultural Law Center and the USDA’s National Agricultural Library.

New Gift Tax Exclusions Announced

Every few years, the IRS adjusts the annual gift tax exclusion.  The IRS recently announced that the gift tax exclusion for 2023 will be increased to $17,000.  This means that a taxpayer may gift up to $17,000 to an unlimited number of persons without having to pay gift taxes or reduce their estate tax exemption amount.  Because the gift tax exclusion is available to all individuals, married couples can gift up to $34,000 annually.

For example, Mom and Dad want to gift money to Daughter.  Mom and Dad can each gift $17,000 to Daughter for a total of $34,000.  Daughter is married and Mom and Dad also gift a combined $34,000 to Daughter’s spouse.  Daughter has three children, Mom and Dad can gift to each grandchild as well for a total of $102,000.

As the above example shows, it is possible to gift substantial amounts of wealth to others by gifting.  Mom and Dad are able to gift $170,000 each year to their family using the gift tax exclusion.  None of the gifts will be subject to gift taxes or reduce the estate tax exemption because the gifts are all less than the annual gift exclusion.

Gifts can be made in excess of the annual gift tax exclusion amount.  Gifts exceeding the gift tax exclusion will either cause gift taxes to be owed or will cause the person gifting to have their estate tax exemption reduced by the amount of gift exceeding the annual exclusion.  The lifetime estate tax exemption for 2023 will be $12.92 million, up almost one million dollars from 2022.

Consider the following example. In 2023, Dad gifts $1,017,000 to Daughter.  The annual gift tax exclusion will cause $17,000 to be a free gift with no tax consequences.  The remaining $1 million exceeds the annual gift tax exclusion and thus will reduce Dad’s lifetime estate tax exclusion by $1 million.  Dad’s estate tax exclusion will be reduced from $12.92 million to $11.92 million.

Gifting can be an effective means of transferring wealth to other family members or friends.  Before gifting, be sure to seek advice from tax advisor as to the advantages and disadvantages of gifting.  For a thorough discussion of the implications of gifting, see the Gifting Assets Prior to Death bulletin available at farmoffice.osu.edu.

A Will or Trust?

A common question when starting the estate planning process is: do I need a will or trust?  There are a number of factors that must be considered before this question can be answered.  A trust is a common estate planning tool but not everyone needs one.  Often times, the best plan includes only a will.

The following are some of the factors to consider when deciding between a will or trust:

Complexity of Plan

The more complicated the plan, the more likely a trust is needed.  Complexity might include addressing on-farm and off-farm heirs issues, buy out of assets at discounts with installment payments, long-term leases, options, right of first refusals and so on.  Wills are much more suitable for plans where all the assets go equally to the beneficiaries without much complexity.

The average person can usually implement an effective estate plan without a trust.  However, most farmers are not average people.  Farmers tend to have more assets, more complex assets, on-farm and off-farm heir issues and business succession issues.  Farmers tend to need trusts much more than non-farmers.

Avoiding Probate

Any asset that is controlled by the will goes through probate.  Probate can cause estate administration to be slower, more burdensome and more costly.  Assets that are controlled by a trust are not subject to probate.  Avoiding probate is generally a good strategy for estate planning.

Most probate can be avoided even without a trust.  All titled assets can include payable on death or transfer on death designations.  For example, bank accounts can include payable on death beneficiaries which allow the funds to go to the beneficiaries upon the death of the owner without going through probate.  Assets without titles can only avoid probate by using a trust.  These untitled assets include grain, crops, livestock and machinery.  For farmers owning large amounts of these untitled assets, a trust may be needed to avoid probate.

Concerns About Heirs

Sometimes, there may be concerns about how an heir might manage their inheritance.  Maybe they have poor spending habits, have a drug/alcohol problem or are heavily in debt to creditors.  Trusts can hold assets for beneficiaries and allow the assets to be managed by a trustee, all outside of probate.  Wills can also hold assets in a trust but will involve the probate court, making managing the trust more cumbersome.  For people who may have concerns about how their heirs might manage their inheritance, a trust is likely a better option than a will.

Second Marriages

A trust is often a good strategy for married couples who have children from previous marriages.  A trust allows the deceased spouse to provide for the surviving spouse while ensuring that those assets ultimately end up with the deceased spouse’s children.  Wills tend to leave everything to the surviving spouse then to children.  A will plan could cause both spouse’s assets to only go to the surviving spouse’s children.  Trusts are often the better option for second marriages.

Transition of Farming Operation

As stated above, crops, livestock and machinery can only avoid probate by using a trust.  Sometimes, these assets get stuck in probate for some time and cause problems for continuing the farming operation. Farmers with large amounts of grain, crops, livestock and machinery should consider a trust for their estate plan.

Legal Fees.

Wills generally have the advantage on legal fees.  Trusts, being more complicated documents, typically cost more to set up than wills.  The cost difference can be several thousands of dollars.  If minimizing legal fees for the estate plan is a priority, a will may be the better option.  It is important to note that spending more money on a trust may save the beneficiaries even more by making the estate administration easier and more efficient.  Spending a few thousand dollars more on a trust may save many thousands of dollars on estate administration.

The above factors are just a few of the many factors to consider when deciding between a will or trust.  For many people a will is completely adequate for an estate plan but for many farmers a trust is the better option.  An estate planning attorney will be able to assist with determining which strategy is better.  For a more thorough discussion on wills, trusts and other aspects of estate planning, see the Planning for the Future of Your Farm bulletin series at go.osu.edu/farmplanning.