There was a time in America when family farms were considered the backbone of the national economy. While those days may have disappeared with the advent of corporate farming, family farms still exist. In fact, family run farming operations have started to make a comeback across the United States. If you own a family farm that you plan to pass on to the next generation, estate planning should take on a heightened importance for you given the fact that the majority of small businesses do not make a successful transition to the next generation. The best way to ensure that your family farm does make a successful transition is to work closely with an experienced North Dakota estate planning attorney. It may also help to start thinking about some common estate planning strategies for farmers.
Choosing the Right Legal Entity
One of the most important decision you will need to make as the patriarch or matriarch of your family farming operation is what legal entity to use for your business. If you do not actively create and entity, your business will be considered a sole proprietorship. While that may be simple enough to pass down to your children upon your death, it is not usually the best choice for tax or liability purposes nor from an investment standpoint. Conversely, a traditional corporation may not be your best option either because with a corporation comes double taxation as well as a variety of other features that are not conducive to a family farming operation. There are a number of other options that are typically better suited to a family farmer, such as a family limited partnership, or FLP. An FLP offers liability protection and tax advantages that other options lack. In addition, and FLP provides an excellent mechanism for turning over the business to the next generation over time, instead of all at once. Whether an FLP is right for your family farming operation is something you need to discuss with your estate planning attorney. The important point is that your choice of legal entity will impact the future of your family farm.
Creating a Trust
Many family farmers, and other small business owners, simply gift their interest in the business outright to their children in their estate plan. The problem with this is that once that interest is gifted, you have no control over what happens to it and it becomes susceptible to creditor claims or division in a divorce. Imagine spending your entire life growing your family farm to the point where it is profitable, and then having your daughter sell her interest off to the highest bidder as soon as you are gone – or worse still, completely running the business into the ground as a result of poor management. Furthermore, take a minute to think how you would feel if your son lost his interest in the family farm to a divorce settlement, effectively making his now ex-wife an owner in your family farming operation. One way to avoid all of these potential outcomes is to create a trust. A trust allows you to appoint a Trustee who will oversee the administration of the trust. The trust terms can help you maintain a certain degree of control over the farm even after you are gone and, best of all, a trust can protect the farm from creditors and spouses.
Planning for liquidity
One of the biggest mistakes family farmers make is failing to plan for liquidity in their estate plan. Operating under the mistaken belief that their estate falls short of the lifetime exemption limit for federal gift and estate tax purposes, many family farmers don’t worry about liquidity. What they don’t realize is that their land, livestock, equipment, and/or crops may be worth far more than they realize on paper, subjecting their estate to gift and estate taxes. Because most farmers lack liquid resources, a hefty tax bill likely requires the sale of necessary assets to pay. By planning for enough liquidity to cover a gift and estate tax bill you are protecting your assets from the threat of sale.
For more information, please join us for one of our upcoming FREE seminars. If you have additional questions about estate planning strategies for farmers in the State of North Dakota contact the experienced estate planning attorneys at German Law Group by calling 701-738-0060 to schedule an appointment.