Estate planning and protecting assets is a difficult task in any industry, but agricultural estate planning can present extremely unique challenges. For this reason, some people delay this process, which Bernard Papp, a lawyer with Campion, Curran, Lamb & Cunabaugh, P.C. in Harvard, Ill., states is one of the largest oversights facing farmers who are planning for the future. With over 40 years of experience in assisting business transitions and primarily farm estate planning, Papp has been fully immersed in the industry and the various laws that have evolved over the years.
“Family agricultural estate planning involves cooperation between parents and children,” Papp says. “Overlooking estate planning can be a costly mistake for the next generation looking to take over the family farm.” Significant estate tax implications can be avoided if a viable estate plan is in place prior to a transition from one generation to another. The options available for an estate plan include the outright sale of the farm, or the appropriate plan to transition ownership from one generation to another. If the land is set for sale, there are other options that can be explored to minimize any tax implications.
As an attorney in the Harvard area, Papp has seen many valuable changes that have helped the farm transition and estate planning process. One of them was the introduction of the “Starker” regulations pertaining to Section 1031 tax deferred, or “like kind” exchanges.
“The 1031 tax-deferred exchange can be important to farmers in estate planning,” Papp states. “This procedure allows farmers to defer capital gain taxes on their farms by taking the money they would receive from the sale of their farms and reinvesting that money into other real estate to be held for investment or for income production.”
“If this process is done correctly, the seller is allowed to defer the gain and roll that into the new purchased property,” Papp says. “This is the most cost-effective way for farmers to sell land that has increased substantially in value since purchase price, but the Section 1031 regulations must be followed precisely.”
Along with the section 1031 tax deferred exchange, farmers have other options when planning for the future. As mentioned earlier, for those interested in keeping the farm in the family, there are many benefits in developing a business entity that allows the passing of the farm from one generation to another without incurring huge capital gains and minimizing tax implication.
The options mentioned should also include a qualified real estate agent like the Farm and Land Specialists at Keefe Real Estate to facilitate the potential for land sale and development. Clancy Green is one of those experienced agents.
“It’s important to work not only with a knowledgeable attorney, but also a knowledgeable land specialist,” Green explains. “Our team has many years of experience working with farmers and landowners to evaluate their land, discuss the potential for development of the farm in the future, facilitate tax exchanges, or present other options for the divesture of the property. We will guide you through the entire process from valuing your land for transition or development, listing and selling your property, to purchasing the new property with the tax exchange funds if so desired or appropriate.”
In closing, Papp reiterates the importance of estate planning in agriculture. “Farmers need to treat estate planning as a part of their business from the start and plan for it sooner rather than later,” Papp concludes. “A clear estate plan is the most cost-effective way to spell out a person’s intent with regards to their farm and land. Not having this plan in place can lead to overpaying taxes from capital gains, incurring excessive legal fees to transition the estate after passing of its owners and in the worst-case scenario, the family’s possible loss of the farm.”
While estate planning may not be at the top of a farmer’s to-do list, it is important to have a concise plan in place before it is needed. This plan, when followed correctly is the most cost-effective way to protect hard earned assets.
By: Amy Ryan