Farm and ranch landowners run several risks when they fail to make a transition plan.
These include the danger that the land will be mismanaged, sold off or lost because the land’s heirs can’t agree about how the land should be operated.
“If you don’t provide a legal entity and structure for how you want your land managed, you have no control over what will happen after your passing,” says Jim Myhra, senior vice president and managing director of the Farm and Ranch Management Group at U.S. Bank.
Passing down a farm or ranch to the next generation can provide your heirs with a secure, long-term income stream if the land is well managed. While each situation is unique and requires a customized plan, here are five key steps to consider.
1. Talk to the family
The planning process begins with honest conversations about what you and your family want from the farm or ranch, as well as the specifics of the plan. These conversations can be tricky, especially if more than one child is interested in, and capable of managing, the land. Or conversely, if nobody is interested.
In these conversations, consider the following:
- Do the different generations share a common vision?
- Can family members work together?
- Are family members willing to stay on top of technological and market changes?
- Can family members negotiate leases and other contracts imperative for generating a fair return?
- Will they understand and have the time and resources to handle the agronomic and soil stewardship management?
2. Gather all business data
Your heirs need to understand what running the farm or ranch business entails. As part of the planning stage, gather all the information on the land and the business. This should include:
- Expenses and debt
- Projected revenue
- Lease arrangements
- Ownership papers
- Depreciation data
- Land management documents
- Documents that describe how the farm or ranch is operated
The above information should help establish baseline financial expectations for the land to assist in making decisions about the distribution of the estate.
3. Consider gifting or buy/sell arrangements
In some cases, you may want to make arrangements to reduce your management or ownership. Consider using annual gifting (which is tax-exempt up to certain dollar amounts) to gradually give the farm or ranch to family members while you continue to work alongside them.
“If you don’t provide a legal entity and structure for how you want your land managed, you have no control over what will happen after your passing.”
4. Consider creating a trust
Engaging an estate planning attorney to create a trust for the property can bring substantial benefits. “It may protect your family from estate taxes, creditors, divorce and lawsuits, and it defines your wishes as to how you want that land to be taken care of and by whom,” Myhra says.
A trust can establish:
- How the land will be managed
- Who will be in charge of managing the property
- Who will benefit from the revenue generated from operating or selling the land
- How long the land will remain in the trust and under the trustee’s oversight
The creation of a trust can be particularly beneficial if your children don’t want to actively manage the property. You may determine that an unbiased professional trustee is the most appropriate choice to manage the land. Professional trustees/land managers can help obtain the best lease terms. They also oversee the care of the land and other assets while the children or surviving spouse continue to benefit from the revenue and retained ownership with certain types of trusts.
5. Revisit your trust every few years
Periodically reviewing your trust with your attorney and trustee helps to ensure it’s updated in relation to changes in laws, estate taxes and the economy. Periodic reviews also help accommodate any changes in the family’s status, such as a birth or marriage.
Regular reviews and updates also demonstrate that your wishes haven’t changed. This can be important in families in which one or more parties contest the trust. “If you make a trust and don’t look at it again for 20 years, it’s much easier to contest,” Myhra says.
Having a plan in place can help ensure that your wishes are carried out. It’s the best way to work toward protecting your land today, so that it benefits the family for generations to come.
Specialty assets require special attention.
Learn more about the Specialty Asset Management Group at U.S. Bank.