A recent Iowa Supreme Court ruling reminds farmland heirs to play fair in love and business, as DTN's Elizabeth Williams reported in "Sometimes Minority Rules" last week.
Yes, your grandparents may have intended inherited land to stay in family hands for generations, if possible. Yes, it's difficult to dissolve farmland trapped inside a 1960s C Corporation. But CPAs, family business mediators and attorneys tell us that increasingly courts are taking a jaundiced view of business partners who fail to pay dividends or set reasonable buy-sell terms when family partners want to leave the business.
The case of Baur v. Baur Farms highlights many common problems when land passes to second- or third-generation owners, says Nick Houle, a CPA who specializes in estate and small business transition planning for CliftonLarsonAllen LLP in Minneapolis.
In the Baur case, the off-farm heir complained he was nearing 80 years old and before he died, he wanted to cash in on the family farm he been gifted and inherited in the 1980s. Over that period, he had received no cash rent, no dividends and could come to no agreement on a price for the family's jointly-owned land that had ballooned in value since its 1980s book value.
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"People feel so strongly that they want to keep family holdings intact that they sometimes forget that minority shareholders have rights, too," he says. On the other hand, exiting partners forget that if they happen to own land in a C corporation, the corporation could first owe as much as 35% on any capital gains, then shareholders are taxed as much as another 20%. That leaves them 52% of the gross gain if they're paying the highest rates, not counting extra damages from state taxes, Houle says. "It's not a good answer."
A better structure would be for farm families to own land inside an S Corporation or LLC. In that case, they'd pay only 20% federal capital gains when land is sold. "We also recommend paying cash rents at the average rates for their counties," Houle says. That's evidence that rates are fair, gives all owners a share of the land's profits and can keep families out of court.
Lance Woodbury, a Garden City, Kan., certified mediator and farm family business adviser, reminds families that it pays to treat all partners inclusively. "Even though someone is a minority shareholder, their 'power' is not just financial ... their real power is in the ability to create challenges to the status quo," he says. "The lesson being that the effort to create a sense of shared psychological ownership (agreement about direction, exit strategies, etc.) pays some dividends in that it helps prevents these kind of disputes."
Houle and Woodbury will be including a discussion of this case--along with other model farm estate practices-- at DTN's "Pass It On!" estate planning workshop Dec. 8 in Chicago. Last year it was our highest rated session of the four-day Ag Summit, with high praise for getting your technical questions answered.
For more information on DTN's four-hour, small group course, "Pass It On!" with Nick Houle and Family Business Mediator Lance Woodbury, go to DTN University at www.dtnagsummit.com
For Elizabeth Williams' story, "Sometime Minority Rules," go to http://www.dtnprogressivefarmer.com/…
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