The Family Farm Estate Planning Tools

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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.


About the Author

Attorney Lee R. Phillips is a nationally recognized attorney who has helped thousands of audiences understand the latest asset protection, business structuring and tax planning techniques. He is a counselor to the United States Supreme Court and holds licenses in law, real estate and insurance. He has a BS in geology, MS in analytical chemistry, and JD in law. Shortly after starting his career as a patent attorney, he started a cancer research project as the national guinea pig, which included five months in isolation intensive care. Over 150 doctors participated directly in his treatment. He understands his audience, because he lost everything due to his illness. You will understand why asset protection became his passion. For thirty years his company, LegaLees Corporation, has specialized in solving asset protection and tax problems for high net worth individuals. Lee is a motivating, engaging, and dynamic speaker who has spoken to over a million people throughout the United States, Canada and the Pacific Rim helping them understand the law and how to use it to their benefit.

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