As part of the succession planning process, most farm owners anticipate the challenge of balancing the older (transferring) and the younger (receiving) generations’ financial needs. And, they know that a difficult decision about the fair distribution of assets among the on-farm and the off-farm children is inevitable. However, equally important in the succession planning process, discussing prenuptial and postnuptial agreements (“marital agreements”) comes as a surprise or is uncomfortable for many from a family or moral perspective.
In the closing days of 2017, the federal Tax Cuts and Jobs Act (“Act”) was enacted. Its impact will be felt by virtually every taxpayer on multiple levels. From a farm succession planning standpoint, the most impactful changes include reduction of individual and corporate tax rates, increases in the federal estate and gift tax exclusion amount, preservation of stepped-up basis and continuation of like-kind exchanges for real estate.
In the typical farm family, the parents’ estate plan is as follows: Farm assets to my farm son, Andrew, and non-farm assets in two (2) equal shares to each of my non-farming children, Susan and Charlie. While the intentions are clear, and while the wills that are prepared are clear, it is not guaranteed that such intent will be carried out. What is not clear is that, in such a situation, the will is often times not enough – it does not dictate where every asset will go in the event of someone’s passing.
A successful transition of the family operation and assets to the younger generation is a significant accomplishment, typically marked by a great deal of time and effort.
As Benjamin Franklin famously declared, the only things certain in life are death and taxes…but the ag/family business exemptions enacted in recent years are reducing the Pennsylvania inheritance taxes for many farm families. With proper planning and action, both before death and even after death, these inheritance tax savings can be substantial.
The use of formal contracts in agricultural production, including crop growing and livestock production arrangements, has been on the rise in recent years. If you find yourself wondering whether it’s worth it to have a formal agreement in place in a production relationship, remember that the purpose of a formal contract is to minimize risk.
“Basis” is a tax term used to describe an owner’s financial investment in a property. When that property is sold, the basis is the gauge for determining whether there is gain or loss from the sale and the resultant income tax consequences of the transaction, if any.
The majority of crop leases are verbal. This informality works in most instances and that is why so many crop lease arrangements are verbal or the original lease agreement has not been updated for a decade or longer. However, when the landowner unexpectedly terminates the lease, the loose legal terms can make the separation more challenging…and potentially expensive.
Oftentimes these lifelong savings are expended on the cost of long term care. To the farm community, this reality presents far more catastrophic consequences by threatening the farmer’s ability to preserve the family farm for future generations.
Farming often involves tilling soil and other activities that change the surface of the land. In addition, farm operations can involve the storage and use of liquid fuels and fertilizers. All of these activities potentially involve state and federal environmental laws such as the Pennsylvania Clean Streams Law and Solid Waste Management Act.