Family farms present a unique estate planning problem. The family farmers often operate on a thin profit margin (we hope it’s a profit), and yet, they are worth millions of dollars. AKA, they are cash poor and land rich.
Dad needs to continue to operate the farm, but for estate tax reasons it needs to be “divided up” among the kids. Even if there is never an estate tax problem, one or two of the kids want to operate the farm and the rest of the kids want nothing to do with the farm.
How does Dad divide the family wealth (the farm) up and still keep the family farm together (literally)? The division could come while Dad is alive or it could be forced when Dad dies.
Trusts are ok for the average family, but farm estate planning is different. Yes, the farmer needs A trust, but the trust alone probably won’t handle all the issues in farm estate planning.
Using LLCs in Farm Estate Planning
Today, a limited liability company (LLC) is probably the best tool to use to divide up the farm. The farm isn’t actually divided up, but its ownership can be divided up with an LLC.
The actual procedure is to move the farm into the LLC. In exchange Dad gets all of the membership interests (stock) in the LLC. That’s not a taxable event, because Dad transfers the farm and gets membership interests back in exchange.
It’s called a 351 exchange. Because farm estate planning usually involves a lot of money, you should probably notify the IRS of the exchange and file a 351 exchange notification.
That will blow your CPA’s mind, because the 351 procedure is an informal “letter” process with the IRS. Just writing the IRS a letter is weird.
Once Dad (and/or Mom) own all the membership interests, they can give them away to the kids a little bit at a time, or the interests can be divided up at Dad’s death. Dividing the “ownership” of the farm up is easy, because it is just a transfer of “stock” not a transfer of land.
Management of the farm can remain with the kids that actually want to run the farm. They can buy back the other kids’ membership interests over time. The advantage is the other kids can’t physically chop up the farm.
Farm estate planning is very complex. The tax aspects are huge. The family aspects are complex. The emotional aspects can also be huge. If you are interested in farm estate planning, you need professionals that specialize in farms.