PASSING THE FARM IS LIKE PASSING ON THE FAMILY CORPORATION
There is no doubt that some modern farmers run large multi-million dollar operations right in their backyard. Maintaining a herd of cows and other grazing stock costs potentially millions to buy or lease (or both) land for the animals to grow on. In addition, the processing equipment for milking cows, labor costs, insurance, veterinarian costs and any number of other costs can run into the millions each year. While most farmers are far from millionaires, most work much harder than many millionaires. Indeed there is more to farming than the land, buildings, equipment, animal stock or orchards and other tangible objects. Tending to corn fields, wheat, soy, orchards, vineyards, sod, tree farms, et cetera are all specific skill sets that require years of training and no small measure of technological investment. The same can be said of a family run saw mill or similar type of business. There is something unique about farmers, however.
Many families are tied to the land. John Mellencamp who was raised in farm country and one of the original founders of Farm Aid wrote about the life of the average farmer, growing up on the same farm that his own daddy did on land cleared by his grandpa, walking along the fence while holding his grandfather’s hand and of being tied to land that fed a nation and made him proud. It is this tie to the land, unique education and training that can start literally while the child is in diapers as well as the emotional bond with families that makes farmers different than most other family run small businesses. There are also unique legal protections found throughout the law for the benefit of family farmer. For all of these reasons transferring a family farm from one generation to the next requires special planning.
While there are many different means to insure that a farm passes with little or no estate tax liability, as noted in a previous blog, the first step is to obtain a good business valuation of the assets of the farm. This can take into account all of the secured transactions that a farmer has at any one time and that seasonally go into effect and are paid off at the end of the season. The final business valuation will allow a person to create a small business in any number of forms. From there the possibilities should become guided by what is the best business decision, including the business form that is best suited to the individual family circumstances. The farmer can pick from a limited liability corporation, a partnership, a simple corporation, et cetera. Creating a corporation can allow the incorporator to create rules for the sale of the corporate stock through the bylaws. There can be different classes of stock that have different rules, rights and responsibilities that allow for differentiated treatment. With a farm split up in certain different ways, the overall threshold amount that would pass via probate, specifically only the shares of the stock, which represent a fraction of the whole farm value, will not surpass the estate tax exemptions. This form of transfer of wealth can withstand changes in tax law that raise or lower the estate and gift tax exemption.