Many farmers face a crucial retirement decision. Yesterday’s traditions often change and their children may no longer want to follow in their parents’ footsteps. The challenges are many. However, there are options available.
In 1971, I started my farming career at age 9 in the Skagit Valley, 60 miles north of Seattle. Grain farming was my job; Roast spinach, sort tulips, pick strawberries, raspberries and cucumbers alongside migrant workers from Mexico. When I was old enough, I drove picking machines with a dozen children lying on planks above a conveyor belt, or I drove an open tractor pulling a combine harvester of green peas while traversing about 1 mile in four hours.
Today, at 59, I realize that I have been preparing this article for 50 years. During the 12-hour shifts on the open tractor, it often rained. My family couldn’t afford proper rain gear, so a plastic lawn bag with holes drilled for my head and arms was fine enough for me. Working six such shifts every seven days gives a teenager time to reflect. It was then that I decided that farming was very difficult and that I wanted an easy office job one day!
Challenges for today’s farmers
A huge debt of gratitude is owed to the men and women who feed the world. You face unprecedented challenges:
- Mother Nature
- Inconsistent commodity prices
- Lack of access to work
- Global competition with reduced operating costs
- Lack of resources to compete with big company agricultural technology
- Next generation (family) choosing a different career path
- You are at an age where you need to slow down or retreat completely
- Potential changes to income tax law
- Inheritance and Inheritance Taxes Influencing the Next Generation
- Lack of experienced financial advisors in the local community
Here are some important points to consider. Many farms are owned by baby boomers, generally defined as between 58 and 76 years old. For the first time in history, the majority of farm children are not destined to follow the family tradition. Instead, they often opt for careers outside of the tough world of agriculture. Second, farmers tend to be land-rich and cash-poor. On paper, their net worth is high, but cash flow can be seasonal. If a farmer sells acreage, he often loses his economies of scale, potentially making it difficult to stay competitive.
Most farms have been passed down from generation to generation. However, many farmers currently do not have an exit strategy for their heirs, and the children no longer feel obligated or have the passion to carry on the legacy of the family farm.
Farm succession plans may provide that the assets will go to children or to outside entities. Each of these options has advantages and disadvantages. There are tax implications whether the farm is sold to a family member or a non-family entity.
Under current law, you can use Section 1031 of the Internal Revenue Code to defer or eliminate income taxes. If you own a farm and don’t have an exit strategy that involves your kids taking over the farm, you’ll probably want to take care of your kids and grandkids in the future no matter what. Many people have heard of Section 1031 exchanges, but do not want to manage real estate as part of their retirement plan.
There is, however, a way to sell your farm and defer capital gains tax using a Section 1031 called a Delaware Statutory Trust (DST). The rules on eliminating your capital gains and creating a lifetime income strategy are very specific. First, it’s important to partner with a Qualified Intermediary to execute a Section 1031 swap. Then, if you don’t want to own, you work with a licensed, knowledgeable financial advisor to swap your property. against passive income.
The exchange process allows you to invest in a diversified portfolio without having to become an owner. You can potentially receive monthly distributions and participate in your share of the appreciation of the newly purchased property. For a detailed explanation, please read I’m a Homeowner: Can I Really Retire?
5 options for farm families
Here are your options if you own a farm and prefer to keep the property in the family.
- Sell the farm to a child in your family.
- Leave the farm to the children in your will or trust.
- Multiple children: Distribution between farmers and non-farmers.
- Multiple children: divided among the children who all want to cultivate.
- Keep the land even if none of your children want to farm. You have an emotional attachment to the farm and want to keep it in the family.
If you sell your farm to your children, you will likely have a very low “cost base”, meaning there may be a large income tax bill due either at the time of sale or over time. time if the farm is sold on an installment contract. There is no base mark-up in this type of arrangement.
A base scaling is a method used to calculate the value of a property that your children will inherit. Instead of using the value of the property at the time of purchase (say $100,000), they can use the value of the property at the time of death (say $1 million) and thus avoid tax on the increased value.
If your children inherit the farm from you, there may be a base increase. Be sure to consult with your estate planning attorney here. In 41 common law states, there is only a half-step on the death of each parent, in nine common law states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin ), there is a double ramp-up. For example, Jane inherited her farm in 1970 when it was worth $200,000. He is now worth $2 million. If she sells or gives away the farm, someone will one day have to pay a taxable gain of $1.8 million. If his heirs inherit the farm, the new cost base will be $2 million, meaning no one will ever have to pay tax on the gain.
Let’s say Farmer Jones has four children: two want to continue the family tradition and two don’t. One option is to use permanent life insurance to fund the inheritance of non-farming children. The farm is left to the heirs wishing to continue operating the farm, and monetary compensation is provided for the two children who do not wish to work the farm. This can be set up using a trust to protect assets and reduce the risk of sibling disputes.
What if Farmer Jones’ four children wanted to continue in the business? Siblings don’t always agree on big decisions – or small ones for that matter. If that could be a problem, the family farm is placed in a family trust and a “trustee” makes the decisions, instead of leaving them to the children to fight.
Maybe none of your children want to cultivate, but you want to keep the land as a heritage asset. In this case, you can leave your farm to your trust with a trustee to oversee the process. The land can be leased and the net proceeds distributed to your heirs generationally.
If you own a farm, here are some possible scenarios for your succession and retirement plan. By using existing tax laws, such as using Section 1031 exchanges using Delaware Statutory Trusts, farmers can pass on their life’s work to loved ones and avoid sharing much of the appreciation. with Uncle Sam.
Owner, Madrona Financial Services
Brian Evans is the owner of Madrona Financial Services, Madrona Funds, LLC and Bauer Evans CPAs and serves as Chief Investment Officer, Senior Planner and Senior Portfolio Manager. He had the honor of ringing the NYSE bell. Evans also hosts a weekly radio show on KTTH 770 AM, KRKO 1380 AM, and KVI 570 AM, is a nationally published author, and has been a regular guest on New Day Northwest, CNBC, and Fox television.