The number of older farmers is growing. A recent USDA-funded study by The FarmLASTS Project estimates up to 70 percent of U.S. farmland will change hands by 2030. However, without a transition plan in place, land assets and legacies could be in jeopardy for thousands of American farming families.
Landowners run several risks when they fail to make a transition plan, says Jim Myhra, managing director of farm, ranch and timber management at U.S. Bank. These include the danger that the land will be mismanaged, sold off or lost because the land’s heirs can’t agree about how the land should be operated.
“If you don’t provide a legal entity and structure for how you want that land managed, you have no control over what will happen after your passing,” he says.
Passing down a farm or ranch to the next generation can provide heirs with a secure, long-term income stream if the land is well managed. That’s why farm and ranch owners should consider taking steps to protect their land and the revenue it generates for future generations.
The planning process begins with honest conversations about what the owner and family want from the farm or ranch, as well as the specifics of the plan. These conversations can be tricky, especially if more than one child is interested in, and capable of managing, the land. Or conversely, if nobody is interested.
In these conversations, consider the following:
• Can family members work together?
• Are family members willing to stay on top of technological and market changes?
• Do family members have the ability to negotiate leases and other contracts imperative for generating a fair return?
• Will they understand and have the time and resources to handle the agronomic and soil stewardship management?
Heirs need to understand what running the farm or ranch business entails. As part of the planning stage, gather all of the information on the land and the business. This should include:
• Expenses and debt
• Projected revenue
• Lease arrangements
• Ownership papers
• Depreciation data
• Land management documents
• Documents that describe how the farm or ranch is operated
The above information should help establish baseline financial expectations for the land to help make decisions about the distribution of the estate.
In some cases, landowners may want to make arrangements to eventually reduce their management or ownership. Some owners use annual gifting (which is tax-exempt) to gradually give the farm or ranch to family members while they continue to work alongside them.
Creating a trust for the property can bring substantial benefits. “It may protect your family from estate taxes, creditors, divorce and lawsuits, and it defines your wishes as to how you want that land to be taken care of and by whom,” Myhra says.
An official trust can establish:
• How the land will be managed
• Who will be in charge
• Who will benefit from the revenue
• How long the land will remain in the trust and under the trustee’s oversight
The creation of a trust can be particularly beneficial to landowners whose children might not want to actively manage the property. In these cases, the owner may determine that an unbiased third-party trustee manage the land. These types of land managers help ensure the best lease terms and commodity prices. They also oversee the care of the land and assets while the children or surviving spouse continue to benefit from the revenue and retained ownership.
Revisiting your trust keeps it updated in relation to shifting estate taxes and helps accommodate any changes in the family’s status, such as a birth or marriage.
Regular reviews and updates also demonstrate that the owner’s wishes haven’t changed. This can be important in families in which one or more parties contest the trust.
“If you make a trust and don’t look at it again for 20 years, it is much easier to contest,” Myhra says.
Having a plan in place can help ensure that the owner’s wishes are carried out. It’s the best way to work toward protecting the owner’s land today, so that it benefits the family for generations to come.
Contact a wealth advisor to learn more about transferring land assets.