As our farm businesses use tax planning tactics to reduce current tax liability impacts, we do not completely reduce the tax but move the tax to a future year. This webinar will provide details on the importance of identifying and calculating your operation’s deferred tax liability and how that can affect your current and future strategic farm management decisions.
Presenter: Dick Wittman, Wittman Consulting, Farm Manager/Family Business... Read More →
ILSOYADVISOR POST
Planning Strategies for the Farmer’s Toolbox
August 19, 2020
The fourth week of the Agribusiness Management Program (AMP) Summer Webinar Series featured attorney Brooke Starks and Kent Leesman from Illinois FBFM in the first of two webinars. They provided helpful strategies for farmers to keep in mind as they think about the succession of their farm and assets. The focus of their presentation were things that come up often in working with clients—equipment transition planning and the intricacies of entity structures.
Equipment transition planning – transfer options:
1. Piece-by-piece. This option allows the farmer to sell a portion of his equipment to a successor each year leading up to his retirement. This works best on a smaller-scale fair market value and is an inexpensive and flexible option for both the buyer and the seller. There are some cons to consider, however. It is not legally binding so there could be uncertainty about what to do in the event of death or divorce. There could also be questions about who pays for maintenance and insurance on the equipment.
2. Installment sale. While this option was presented by Starks and Leesman, they do not advise clients pursue it. An installment sale requires the successor to make payments each year towards the full purchase of the equipment. The transaction is documented, and all machinery listed with its fair market value with the intention of the buyer purchasing all equipment. The major disadvantage to this option is that the seller is taxed on the full amount of the equipment in the first year. Because of this, no tax advisor would recommend this option.
3. Lease with option to purchase equipment. This may be the best option for farm families as they think about transitioning equipment in a succession plan. The successor leases the equipment for a specific number of years and then is given the option to purchase after that time period. This is not considered an installment sale by the IRS, so it stretches out payment and income for both parties. There may be some extra costs associated with getting the documentation correct, but it is important to have all the details correct for tax purposes.
Entity Structure as a Mode for Equipment Transfer
Starks and Leesman them moved into a discussion about land and operating entities as a tool for transition or using an LLC as a farm ownership succession tool. As farmers think about the potential to form an LLC, there are a couple important things to consider:
- An LLC is a business entity and can own almost anything a business can own (including land or equipment). As the owner of the LLC, you are exchanging your dirt for shares of a company. The company owns the dirt, and you own the company.
- The LLC operating agreement dictates how the entity will run and contains rules and restrictions.
- The “shares” of the company are called membership interests or percentage interests and there can be specific provisions of who can take membership shares. Also, a person’s membership in an LLC is personal property, not real estate.
- A farm operating LLC holds the equipment, employee salaries, insurance and leases. A land-owning LLC holds your land. You don’t want to see land and equipment in the same LLC because equipment is the biggest point of liability exposure and you don’t want that bundled with the land that provides your income.
Some closing reminders encouraged farmers to be extra communicative with their families to ensure no surprises when the farm succession happens. Success looks different for each farm and it’s important to document everything, revisit the plan often to make any necessary adjustments, and ask (and pay) for help.
View the full webinar here: https://www.youtube.com/watch?v=XrNP_YxixRY&feature=youtu.be
For additional AMP information, visit the program webpage at https://www.ilsoyadvisor.com/on-farm/ilsoyadvisor/amp-agribusiness-management.
Laura Hahn
The author is a senior account executive at Charleston|Orwig.
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