A comprehensive succession plan gives your farm the best chance of surviving for future generations, notes Polly Dobbs, an attorney at Starr Austen and Miller in Logansport, Ind. There isn’t a cookie-cutter approach to estate planning, so you must factor in your goals, family dynamics and financial situation. She shares the following strategies in her own words:
1. First Right of Refusal: This may be given during a producer’s lifetime, or it can become effective at death. A landowner can “sell” a first right of refusal to a family member, trusted neighbor or long-time tenant. Going forward, that farm cannot be sold without first being offered to the holder of the first right on the outlined terms. A right to purchase can also be effective at death. For example, your will or trust could leave the farm equally to all your children and require your off-farm children to offer their interest in the ground for sale to your on-farm children using the appraised value on the date of your death.
2. Dynasty Trusts: Protect your farm during your children’s lifetime for ultimate distribution to your grandchildren or great-grandchildren via a dynasty trust. If your children never truly own the farm, then their creditors cannot reach it nor can they lose it in a divorce. You control who inherits the farm because your children’s last will and testament doesn’t govern the disposition of your dynasty trust’s property. A dynasty trust can ensure all farm income goes to your children for their lifetime and can help keep the farm intact for distribution to your grandchildren without being included in your children’s taxable estates.
3. Limited Liability Company (LLC): The formation of a limited liability company (LLC) can provide an orderly arrangement to keep farm property within the family by establishing an order of succession and control over the transfers of the interests. Frequently, children and parents contribute land to an LLC. In return, each receives proportionate ownership shares. An LLC may restrict the right of non-family members to acquire interests in the farm ground. Other benefits of an LLC include the promotion of knowledge and communication about the family farm and other assets. An LLC may avoid probate administration upon death if used in conjunction with a revocable trust agreement.
4. Buy-Sell Agreements: A buy-sell agreement is a no-brainer when unrelated parties are in business together or when brothers or cousins farm together and want to set forth exactly how the business will transfer upon the death of one. Upon certain triggers, an owner may be contractually obligated to sell his interests to the company or other owners. The company or other owners may have the option to buy those interests or be required to do so. You might want to agree on what the purchase price should be and then reevaluate and update the price every year according to the current fair market value. The price set in a buy-sell agreement is not binding on the IRS for valuation purposes unless it meets specific arms-length characteristics. Most commonly, the purchase price for an interest in a business that owns a farm is going to be based on an appraisal of the farmland and improvements thereon, and also a business valuation, which may include discounts for lack of control and lack of marketability.