Gifting as business succession

Last week, the Kansas City Federal Reserve released its Fourth Quarter Agricultural Conditions Report.  The Report noted what we all intuitively knew — farmland prices keep rising and as a result, young and beginning farmers are having a difficult time acquiring land.

But there may be some ways to transfer land to young and beginning farmers who do not have the equity a more established farmer has.  One of those methods is the use of gifting.  How would that work?

First, recognize that the annual gift tax exclusion amount (for 2013) is $14,000, or if gift-splitting, $28,000 for spouses.  Thus, you may gift property with an fair market value of up to $14,000/$28,000.  You can think of gifting cash but also more broadly than that.  Property can be personal property, such as a piece of machinery or breeding livestock.  You could consider gifting crops, seed, or other inputs needed to get started.

Property could also be real property, such as a parcel of land or a residence.  You could gift various types of interest in the property, such as a leasehold.  Again, there is no reason not to think somewhat outside the box if you would like.

But property could also be intangible, such as shares of a limited liability company or S-corporation.  You may consider gift such shares but you will also want to consider the type of shares, such as voting or non-voting.

I realize that this may seem a paltry amount of property, especially in large operations.  But it is nonetheless a method to begin the transfer of the operation to the next generation.  It is also a method to slowly bring the next generation into the business, while mentoring and providing insight into the operation.

Also keep in mind that the monetary amount of the annual gift tax exclusion is indexed to inflation.  Thus, for 2012, the monetary limit was $13,000.  For 2013, it is $14,000.  The exclusion amount will continue upward.  There is no guarantee that inflation will keep apace with valuation increases in the operation but, should you run the numbers on your operation, you may be able to gift more than a nominal portion of your operation throughout the years.

As you consider business succession and transition, you are welcome to contact Legal Aid of Nebraska.  We’re happy to discuss the myriad of methods available for business succession and transition.

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