Farmers tend to be cash poor and asset rich. The worth of your farmland and related assets may exceed estate tax exemption amounts, leading to a hefty tax being assessed on your property once you pass on. Additional complications may further drive up expenses. Often, families find themselves selling land—or even the farm as a whole—to generate cash to cover these expenses.
Preventing that from happening is a key part of your estate plan.
Farmers with land, assets, and personal accounts in excess of certain amounts may have their property subject to massive estate taxes. The thresholds for these taxes are:
- $5.49 million for federal estate taxes of 40% (as of 2019).
- $4 million for Illinois estate taxes, which range from 0.8% to 16%.
As such, if your personal assets—including your farm—are worth more than those amounts when you pass on, it could result in a significant loss once all taxes are applied.
Protecting Your Family Farm
Fortunately, the cutoff points for estate taxes are fairly high, and holding property jointly with a spouse can effectively double the federal exemption. However, there are additional measures that are worth taking into account, both when it comes to avoiding estate taxes and keeping your property in the family.
Create a legal entity for the farm
Most family-owned farms are operated as a sole proprietorship by default, and that means it will pass through probate when the owner passes on. To protect your farm from the probate process, consider structuring it as a legal entity, such as an FLLC (family limited liability company). Doing so not only helps keep the farm in the family, but it may be eligible to certain tax advantages as well.
Determine whether your family wants to take over
Often, farmers assume their children will want to take over the family farm, but that’s not always the case. It’s vital to take the time to talk to your children about their desires and to make plans regarding your farm in the event that they don’t want it.
Train your heirs
On the other hand, if at least one of your heirs does want to carry on the family business, you’ll need to give them the training they need to do so. Making sure they’re well versed in running the farm will reduce the odds of failure in the future.
Finally, it can help to create some liquidity. A life insurance plan can be a great way to do this since it provides a cash payout to assist your family after you pass on. The downside is it might raise the value of your estate, potentially exposing it to taxes, so it’s worth involving an estate planning attorney in the process.
Getting Estate Plan Documents Together
In addition to taking measures to protect the farm, there are a number of documents that are necessary to your estate plan. These include:
- A written will
- Power of attorney and a living will
- Financial power of attorney
- A revocable living trust
These can help solidify your estate plan and reduce your family’s distress after you pass away. An attorney, such as us at Hart David Carson LLP, can help you prepare these important documents.