Deteriorating farm finances are complicating the transfer of farm ownership to the next generation.
Farm parents and their successors may need to re-evaluate their previous expectations as cash flows shrink and proposed Treasury regulations limit the use of family stock discounts, cautions Rod Mauszycki, a Minneapolis-based tax principal for CliftonLarsonAllen.
Farm incomes have cratered since 2013, with expected 2016 net farm incomes plunging 42% in the last three years, USDA estimates. Mauszycki says income for many of his upper Midwest grain and dairy clients just can't support two families at this stage, so growth is the only option if they want to add a manager-in-training to the business. That can add anxiety to the senior generation, however.
"At a dairy, Dad and Mom's choice is often to co-sign for a multi-million dollar expansion late in their careers, risking their life savings, or simply sell the farm and retire as millionaires," Mauszycki says. Grain farms are looking to expand by renting or buying more acres, which may also incur more machinery debt.
Mauszycki and Nick Houle, a CPA and principal with the private client tax group at CliftonLarsonAllen, will coach farm families on how to address challenges of farm handoffs at a four-hour DTN University course, "Best Strategies to Enter and Exit Ag," on Sunday Dec. 4, prior to the DTN-Progressive Farmer Ag Summit in Chicago.
New this year is focus on the economic issues facing both the new and exiting farmers, Mauszycki added. The mismatch between faltering incomes and affordability of land is one of those prime concerns.
Farmland still approaches an average of about $7,500 to $8,000 per acre in Iowa in Illinois, escalating a 250-acre farm into a $2 million proposition. A 2016 Progressive Farmer magazine poll of 1,600 farmers by Zogby Analytics found 85% of respondents were concerned – including 50% who were very concerned – that land prices will make it hard for their family to farm for another generation.
Some planning requires balancing fairness, not just economics. In one recent Minnesota case, the girls ended up with $34,000 and the boys inherited $4 million in farmland. The boys had paid low rent to their mother over the years and her nursing home care depleted their sisters' inheritance, their attorney told DTN.
Before Congress lifted estate tax exemptions in 2013 (now $5.45 million per person, adjusted for inflation annually), estate planners favored gifting strategies to transfer assets to the next generation and slim down the size of elder owners' estates. But that practice has fallen out of favor for smaller estates, since it transfers tax basis with the property and can expose recipients to steep federal and state capital gains, sometimes approaching 40% or more, should the new owner choose to sell the property later.
UPHEAVAL AHEAD FOR BIG ESTATES?
One of the most popular techniques to make inter-family farm transfers viable has been to discount minority stock ownership. Because closely-held business owners can't sell stock outside the family, and sometimes must wait years for payouts, courts have allowed discounts of 30% to 40% on minority shares. However, IRS has announced regulations that would discontinue the practice, with a final ruling expected in late 2016 or early 2017 (see https://www.dtnpf.com/…). Those new regulations would take effect in January 2017, at the earliest, so affected families have time to review options ahead of the rule change.
Farm families typically spend a decade or more training successors and transitioning ownership. It's worth giving your plan a check-up along the way to assure it makes sense given changing tax codes, estate tax exemptions and economics, Mauszycki says. "What experts recommended 10 years ago doesn't necessarily apply today."
For details on the Dec. 4 pre-Summit DTN University tax workshop in Chicago go to http://www.cvent.com/…
For all Ag Summit details go to www.DTNAgSummit.com
Follow Marcia Taylor on Twitter@MarciaZTaylor
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