Estate Planning for Farmers & Ranchers
Farms and ranches are commonly owned and operated as agriculture family businesses. For many, farms and ranches must be managed and operated as other business entities would be. For some, farms and ranches are multi-generational family businesses, which also provide sources of income and assets for the family.
Because of the mixed nature of business and family, an estate plan for farms and ranches will ideally help protect the valued assets which supply the agricultural business with revenue and also ensure that the property is sufficiently protected for life’s foreseeable and unforeseeable events. Farm and ranch estate plans may ensure that the farm’s assets are transferred properly to the next generation and may also reduce conflict within farm and ranch families. Estate plans for agriculture businesses will also help reduce your expenses, reduce tax burdens, and more importantly, protect your farm or ranch legacy.
A Will May Not Be Enough
Estate planning for farms and ranches can be complex. Some will tell you that to own a farm or ranch is to be “asset rich but cash poor,” but many do not account for the fact that farm and ranch land and the related assets values will increase over time. While farms and ranches may not have an influx of cash on hand, the value of the assets and property generally will warrant a comprehensive estate plan.
Because of the nature of these types of agricultural businesses, using a Will alone as the estate plan may not be sufficient. A Will may be contested, may be outdated and is not designed to help future generations transition into farm and ranch ownership. Further, probating a Will can be costly and time consuming. For some farm and ranch owners, privacy of assets and their corresponding values is important. Due to the probate process, one downside to using a Will alone is that this private information will be open to the public.
The probate process can also be tedious for those owners who have land and property in multiple states. Probates are required to be filed in the state where the land is located, which could increase the burdens of properly transferring the property. However, a Will, coupled with other estate planning tools, may be beneficial for the protection of specific items or assets. Utilizing a more complete estate plan can help farm and ranch owners avoid issues and unintended consequences that the probate process may create.
Farm and Ranch Estate Plans
To best protect your farm and ranch assets, understanding how the transfer of assets and the transfer of operations is critical for the plan. Determining whether you intend for the farm or ranch to pass down to lower generations versus selling the assets and property will also determine how your estate plan should be set up.
For most generational farmers and ranchers, there are emotional ties to the land and property and many do not wish for the land and assets to be sold; they want the farm or ranch to stay in the family. If the goal is to pass the farm or ranch to a new generation, farmers and ranchers are encouraged to consider a transition period where they may prepare and plan to turn over control. During this transition period, those in line to control, or the new generation of owners, should not only understand the financial aspect of the business but also understand how to efficiently manage the business. One concern for many is the security of the family home. Many times, farms and ranches may also have a family home located on the property. During this transition period, plans and protections can be put into place to protect the family home and the inhabitants.
Many times, when referring to a farm or ranch, it is beneficial to understand that, generally speaking, we are referring to the operation and the land. Certain heirs or family members may live on the farm and contribute to the everyday operations. For business purposes and estate planning, some may choose to create distinct plans or business models for the operation and the land. This separation can ensure that all heirs may share in the land while also ensuring that one designated heir continues to control the operations.
Farm or Ranch Trusts for Asset Protection
While a Will may be a viable option for specific purposes, establishing a trust for the farm or ranch will allow the trust to hold, manage and distribute property. A trust is designed to ensure that your assets and property are taken care of during your lifetime and then properly distributed upon your death. Trusts allow owners the ability to set out in detail when, where and how property should be distributed. The Trust is designed based on the instructions given at the time of its creation. Trusts also have the ability to hold real property and personal property. There are two types of trusts: living trusts and testamentary trusts.
Testamentary trusts are generally created through a Last Will and Testament and do not take effect until the death of the farmer or rancher. This type of trust is commonly used to reduce estate taxes and protect assets post-death. However, testamentary trusts will not help an owner avoid probate. Thus, utilizing a living trust may prove to be a more flexible option for farm and ranch owners.
Living trusts are generally broken into two main types of trust: revocable and irrevocable.
Revocable Living Trust: a revocable living trust may be used during life and also continue after the death of the farmer or rancher. This trust permits the farm to continue to operate and be properly managed if a disability or incapacity occurs. Revocable living trusts may be amended prior to the farmer or rancher death.
Irrevocable Living Trusts: an irrevocable living trust may also be used during the life of the farmer or rancher but cannot be changed, modified, terminated or amended without the trust beneficiaries’ consent.
One of the key benefits of a living trust is probate avoidance. Apart from that, living trusts are also beneficial in that assets and property may remain private and the transfer of the assets and property can be quickly achieved, even when property is owned in several states, ensuring that the property remains in operation. The quick transfer also ensures that the farm or ranch remains viable and successful.
Farm and ranch owners may also enjoy asset protection with a living trust. When set up properly, assets which are placed in a living trust can be protected from liabilities, lawsuits and other creditors. Additionally, living trusts can be set up to manage assets for the future protection of a minor beneficiary, holding the farm or ranch until the minor is able take over and hold title.
The flexibility of a living trust allows a farmer or rancher to develop an estate plan that ensures the future generations can not only operate the property successfully, but also helps reduce stress and conflicts while still allowing the farmer or rancher to retain some control while living. However, living trusts require care and attention. As assets and property are increased, a farm or ranch owner must take action to ensure that these additions are properly transferred to continue to avoid the probate process completely.
Although different trusts have different pros and cons, most trusts are an effective and efficient way to manage a farm or ranch and are valuable to an estate plan that wishes to control distribution of the assets and property and avoid the probate process.
Creating Business Entities
Establishing an entity like a corporation or a limited liability company (LLC) also allows the farm or ranch, as well as the assets and property, to be clearly defined. These entities may also allow for division of control, revenues, and long-term business plans among multiple parties. When established correctly, a corporation or LLC may continue to operate forever and can allow for quick transfers when necessary. Careful planning in the creation of the entity is necessary to ensure that the entity does not dissolve and the farm or ranch remains protected well into the future.
Creating an entity for a farm or ranch also permits one party to control the productive, active side of the business, while reducing the remaining parties’ roles in the business to a more passive position. Further, creating these entities can be affordable and help with certain tax liabilities.
For some, creating an entity may be a more appropriate estate planning tool, depending on the size of the assets, number of heirs in the new generation, and long-term expectations of the business. As an example, the King Ranch in Texas encompasses roughly 825,000 acres with hundreds of family heirs in a position to benefit. In 1914, King Ranch created a corporation which would hold the ranch and distribute stock shares to the future generations. Today, King Ranch Corporation is still in existence with hundreds of shareholders, all receiving stocks as pass downs from the generations before.
However, as with living trusts, entities also require care and attention as well as careful instructions at the onset for the management of the agricultural business.
Farm and ranch ownership can be a mixed endeavor: business and family relationships can make ownership more complex. Because every farm and ranch will have distinct operations, assets, and needs, an understanding of these factors will help build an estate plan that can protect and preserve farm assets for many generations to come. If you or someone you know needs legal counsel for estate plans to protect an agricultural business, please contact our firm at (405) 561-3170 and we would be happy to discuss options and help you decide on the best plan for your specific needs.