he most frequent question I get about transferring a farm from one generation to the next is ‘what’s the best way to avoid taxes?’” says Dr. Gordon Carriker, agriculture business specialist with University of Missouri Extension. “Most are surprised when I tell them that they cannot avoid taxes – there are ways to minimize taxes, but that taxes should not be their number one concern. Communicate with the children and let them know what the parents want, then formalize those desires through the available legal instruments.”
A will, a revocable trust and gifting are all tools farmers should consider when they are looking at transferring the farm to the next generation. There are tax consequences with all of these and consulting a financial advisor and/or an attorney experienced with farm estate planning is strongly recommended. Generally speaking, the costs are very reasonable compared to what the state will charge through probate. “Always remember, if you do not have a plan in place for your estate, and you pass away, the state has a plan that will determine how your property is distributed,” says Dr. Carriker.
Carriker continues, “I recently attended a national meeting and heard Professor Ron Hanson, University of Nebraska agricultural economist and renowned speaker on estate planning, talk on this topic. I expected to hear about the ups and downs of various estate planning tools. To the contrary, Dr. Hanson talked about the importance of communication and maintaining family relationships.”
Two points that Dr. Hanson has learned from his personal life as well as his 35 plus years of experience are likely very eye-opening: first, parents should never try to make their children feel obligated to return to the farm if the children’s interests and dreams are elsewhere; and second, children should respect the end desires of their parents, because the parents owe their children nothing. Having a disinterested child feel obligated to return to the farm can lead to hard feelings towards the parents and ultimately in the potential mismanagement and/or liquidation of the farm once the parents have passed. In the absence of a written promise, i.e. a will or trust document, no adult child should plan on inheriting the farm, nor question their parents’ end wishes for the farm.
Without a doubt, the farm succession process can present a great deal of emotional stress on all family members involved and family values can seriously be tested throughout. All issues need to be discussed with all family members involved and resolved to the greatest extent possible for a successful transition to take place. Parents need to have a clear vision of the future of their family farm business and discuss that future between themselves and with all family members. In-laws should be included in the discussions or feelings of distrust will arise and jeopardize a successful transition. Having a prenuptial agreement, especially for a child’s second marriage, is a good idea; nobody gets upset if they feel they are treated fairly.
If the parents plan to retire and transfer the farm to the children then the “boss” parent has to be willing to completely relinquish the “boss” hat to the adult children taking over the farm. Ownership without control is destined to failure.
Parents need to be willing to treat all their children equitably and fairly. This is very important when one child has provided a greater share of labor over the years, helping grow farm equity. The lesser involved children need to recognize that contribution as well.
Statistics indicate that mom will outlive dad, so having a written strategic plan in place before either parent dies is of utmost importance. What if mom decides to remarry? That situation can really complicate matters.
Dr. Gordon Carriker is an agricultural business specialist with the University of Missouri Extension.
