There is a lot to think about when putting together a succession plan for a farm: Will it stay in the family or be sold? If it does stay in the family, will all or some of your children remain active? How long do you want to stay involved in the operations? The path to get where you want can be daunting. Luckily, there are certain steps that can be taken now to make the process easier when you are ready to transition. One step we suggest is to separate the farm land from the farming operations.
Typically, this would mean holding the farm land in a limited liability company (LLC), and holding the farming equipment and running the operation through a separate entity – either another LLC or a corporation. This affords the farm owner a number of benefits.
- Clarity of Sources of Income. The farm owner can step back and assess the value of both assets, the farm land and the farming operations, independently of each other.
- Income Taxes. Rental income is generally passive income and is not subject to social security and Medicare taxes like earned income. With two entities, some income can clearly be treated as rental income.
- Liability Protection. The greatest risks a farmer faces relate to the farming operation, and not to the ownership of the land. By using a separate legal entity for the farming operation, risk can be shielded from the land itself.
- Future Transition of Ownership. If the farm owner has multiple children and wants to leave the land to all of them, placing a value on the inheritance and coming up with fair terms is easier when the operations are separated. Farming operations can be passed on to the children who are actively participating in the farm, while farm land can be left to all children with a structure in place to govern the relationship.
In some instances, we need to be aware of payment limitations imposed by the Farm Service Agency (FSA). In those situations, a partnership might be needed for the operations rather than a corporation or LLC. In such cases, we can take additional steps to accommodate the FSA requirements and still obtain the appropriate liability protection for the individuals involved in the operations.
Though there is a lot to consider when putting together a succession plan for your farm, remember that you do have options that will help make running the farm go smoothly for generations to come.
ABOUT THE AUTHOR – andy gutwein
Andy Gutwein is co-founder and an attorney at Gutwein Law. His practice focuses primarily on estate and succession planning and administration. Prior to earning his J.D. from The George Washington University in Washington, DC, Andy obtained a BS in Economics, Honors Program, from Purdue University. He is currently serving on the Board of Directors of Westminster Village of West Lafayette, Lafayette Police Foundation Board of Directors, and Community Foundation Fund Devleopment Committee.
