Month: August 2013

Friday Facts, Fun and Food.

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Happy Friday!  I am headed out on my vacation today and as such, blogging will resume the week of September 16th.  Before I leave on a jet plane, however, some tidbits:

DTN/The Progressive Farmer has an interesting article on a farmer-to-farmer program for retired farmers.

The BBC has an interesting article on U.S. professionals leaving the corporate ladder for farming.

We return to DTN/The Progressive Farmer for an interesting look at Nebraska water regulations vis a vis irrigation.

The USDA has released its farm income forecast.

If you are going to be near Des Moines on November 6 – 8, check out the 4th National Conference for Women in Sustainable Agriculture.  I’ll be there so stop and say hi!

Craving some sweet with some heat?  Try this Fiery Grilled Peach and Habanero Salsa with pork, chicken, or by itself.

What Are the Numbers Telling Us?

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I have been reading a very interesting report from the USDA’s Economic Research Service, “Farm Size and the Organization of U.S. Crop Farming” by James M. MacDonald, Penni Korb, and Robert A. Hoppe published in August 2013.  What do I think I’ve learned that is useful to beginning farmers (beyond our previous discussion of the factors of beginning farmer success?)

First, there is no doubt that farming consolidation is happening.  Farms are getting bigger.  But, farming is also getting smaller.  There are a number of small farms in the United States, with niche or specialty products.

But here’s what really caught my attention: the return on investment for fruits, vegetables, berries, and nuts.  It is staggering, especially compared with “traditional” crops of corn, hay, soybeans, and wheat.  As the report notes, vegetables and melons; fruits, nuts, and berries; and greenhouse/nursery crops accounted for nearly 37% of all cash receipts from crops in 2007 but less than 4 percent of harvested acreage.

What does that mean in Nebraska, a state where consolidation doubled?  A cynical view of the numbers could mean that the opportunities for entering farming as a profession have decreased.  Or, it could mean there are opportunities for beginning farmers with a little ingenuity, imagination, and a business plan.  What does the beginning farmer need to know?

  • In order to know, research, research, research.  This doesn’t necessarily mean hiding your nose in a book all day, but it does mean knowing the return on investment for commodities you are interested in selling.  It also means knowing whether you can even grow/produce those commodities with the land you have available.  For example, as great as it would be, I don’t think cranberries are going to be successfully grown in western Nebraska.  (I am welcome to be proven wrong, however!)  So, talk to producers who have similar operations.  Take farm tours.  Check out webinars.  Take a class.  Do a small experimental patch for the commodity you are thinking of growing.  Learn how to market your commodity.  In short, keeping learning, because even when you think you know it all, there is something else to learn.
  • Be willing to change tactics and add enterprises.  Okay, so maybe your dream blueberry operation isn’t possible with the resources you currently have possible.  But perhaps a niche operation growing hops is possible.  Or you grow some great fruits and veggies and now, can expand to value-added enterprises such as jams and jellies.
  • Learn from failures.  So that value-added enterprise of making jams and jellies didn’t work out like you anticipated.  That’s okay so long as you learn from it and incorporate that knowledge into your next strategy.
  • Know that you will have to provide labor and physical capital to gain income.  I know of no other way but I’m happy to be proven wrong.

It is possible to become a successful farmer — after all, everyone begins somewhere.  But don’t just begin somewhere randomly.  Have a plan, know the markets, and use all the help you can get.  That help includes this program.  If you have financial or legal questions about beginning a farming operation or just want to discuss ideas, you are welcome to contact us.  After all, it is free of charge — why not take advantage of it?

A Quick Primer on The Federal Rules for an Unpaid Internship

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As we approach fall and winter, it is time to begin considering the 2014 harvest and your operation.  Some readers of this blog use internships during the season to assist the farm whereas other readers of this blog may be interns themselves.  What do you need to know?

The United States Department of Labor has a set of rules regarding whether there is an internship or employment.  All of the following must be met to exempt an  individual from federal minimum wage and overtime law (e.g. be classified as an intern):

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in an education environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under the close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and intern understand that the intern is not entitled to wages for the time spent in internship.

Note that the above applies only to for-profit enterprises; it does not apply to non-profit and governmental entities.

The question becomes: can an unpaid internship on a farm operation qualify as an internship under the rules above?  The answer is most likely no.  An unpaid internship likely displaces regular employees and the farm would derive immediate benefit from the internship.  As the Department of Labor explains:

If an employer uses interns as substitutes for regular workers or to augment its existing workforce during specific time periods, these interns should be paid at least the minimum wage and overtime compensation for hours worked over forty in a workweek.

There also isn’t much of an argument that, for example, your intern is in the fields harvesting fruits and vegetables or maintaining your irrigation system, the farming operation is deriving immediate benefits from the intern.

If you are considering unpaid internships, or are considering applying for an unpaid internship, keep the above rules in mind.  If you have questions, you can contact your local U.S. Department of Labor Wage and Hour Division.

Friday Facts, Fun, and Food.

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Can you believe college football season is almost here?  And that the weather has been so beautiful of late?  If you don’t make it outside this weekend, here are some tidbits for your reading pleasure:

The apocalypse sperm bank by operated by the USDA is fascinating.

This is a great NPR report on young farmers and access to land and capital.

With school starting, do you want some lesson plans on conservation, soil science, plants, and more?  The NRCS has put together lesson plans for all ages.

The Open Harvest Dig Deeper Farm Tour and Community CROPS Farm Walk is Saturday, September 7th.

If you are in the Nebraska Panhandle, check out this amazing-sounding farm-to-table dinner in Harrisburg, Nebraska.

Got some fresh eggplant and want a sandwich?  Allow me to recommend the Grilled Eggplant Sandwich.

An estate for life! (Or, the life estate.)

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As many farmers and ranchers consider retirement, a question frequently asked is about the intersection of retirement income, assets, and health care costs.  When this question is asked, it is immediately followed by “but my neighbor kept their land and is on Medicaid.  How does that work?”

While I cannot speak for every possible estate plan out there, the most likely answer is the use of a life estate.  The formal definition of a life estate is an estate that is held for the duration of a person’s life and then passes to the remainderman.  What is the plain English definition?

That requires a bit more words.  In a life estate, the owner of property deeds the ownership to another person (“remainderman”, which for clarity sake, can be a woman or multiple people) but retains an income interest for the remainder of his or her life.  In other words, the “owner” controls the property for the remainder of his or her life, including receiving income from the property, but at the time of death, the property automatically passes to those people named by the owner when he or she made the life estate deed.

Why do some people employ a life estate deed?  In order to qualify for Medicaid.  But it can’t be that simple, can it?

No, it can’t.  First, Nebraska Health and Human Services employs what is termed a “look back period” to determine if any assets were transferred by the applicant at less than fair market value.  This look back period is 60 months, or five years.  If any transfers, such as a life estate, occurred within 5 years of the application for Medicaid, a person is denied Medicaid coverage for the number of months the fair market value of the asset would provide care.

Also, keep in mind that a life estate is irrevocable.  You cannot change your mind about the life estate deed.  The only exception to this is if the remainderman also agree to revoke the life estate deed, which is not likely to occur.  Additionally, the remainderman have an ownership interest in the property.  That means creditors of the remainderman can possibly come after the property.

Obviously, there is much more to this and the above is for informational purposes only.  If you are a South Dakota or Nebraska farmer or rancher and have questions, feel free to contact us.

First, some definitions.

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When I was in high school and college, I was a competitive debater.  Every debate began the same: by defining the terms of the debate.  While we are not engaging in a debate on this blog, it is nonetheless useful to start with definitions.

As we more fully delve into estate planning on this blog, it is useful to keep definitions in mind.  The definitions are not difficult but nonetheless, it may be possible that these are terms that are not encountered in your day-to-day life.

Beneficiary:  This is the person who is is designated to receive benefits (such as money or income) from an insurance policy, retirement policy, a will, or trust.

Decedent:  The person who has died.

Estate:  This is all the property, both personal and real, that a decedent has at the time of death.  This is similar to a probate estate, which is all the property within a given jurisdiction.  Thus, if a decedent has land in both Nebraska and South Dakota, the decent has a probate estate in Nebraska and South Dakota.

Executor:  This is the person responsible for collecting all the assets of an estate, distributing all the assets to the proper beneficiaries, paying all claims made to the estate (e.g. final medical bills), paying taxes, and appearing at probate proceedings if required by the jurisdiction.  Also called a personal representative.

Heir:  A person designated to inherit some or all of an estate when the decedent dies without a will.  The difference between an heir and a beneficiary is the existence of a will or other estate planning document.

Intestate:  Also intestacy.  This is the state law that controls inheritance when a decedent dies without a will.

Joint Tenancy:  Joint tenancy, as opposed to tenants in common, allows individuals to transfer property with ‘right of survivorship’.  This means each each co-tenant shares an undivided, fractional interest in the property.  As each co-tenant dies, the undivided fractional interest passes to the remaining co-tenants.  Joint tenancy is most commonly found among husband and wives.  Each spouse has an undivided 50% interest in the property.  When the first spouse dies, his 50% interest passes to his wife.  The wife then has 100% undivided interest in the property.  Joint tenancy is a non-probate transfer of property.

Non-probate property:  Property that is not subject to probate.  This can include, but is not limited to, insurance policies, annuities, retirement accounts, property in trust, payable-on-death bank accounts, transfer on death deeds, and other such property that is paid directly to a beneficiary upon death from a source other than the decedent’s estate.  Non-probate property transfers automatically upon death and is not subject to probate proceedings.

Probate:  A proceeding in state court that is the administrative process for distributing an estate, whether by will or intestacy.

Tenants in common: Like joint tenancy, co-tenants share an undivided interest in property.  However, unlike joint tenancy, when a co-tenant dies, the undivided interest passes not to the other co-tenants but to those beneficiary/beneficiaries designated by the decedent.  For example, a husband and wife are tenants in common and each own a 50% undivided interest in property.  The wife’s will states that the beneficiary of her estate is the couple’s only child.  If the wife dies prior to her husband, her 50% interest does not automatically transfer to her husband (such as it would with joint tenancy), but rather, her 50% interest passes to her child.  Thus, the husband owns a 50% undivided interest and the child owns a 50% undivided interest in the property.

Testate:  Dying with a will.

Trust:  When property is held by a person or entity, called the trustee, for the benefit of beneficiaries pursuant to a written instrument known as a trust.  The trust articulates how the trustee can and should manage the trust assets for the beneficiaries.  There are many kinds of trusts and trust documents to list here.

Will:  A will is a document that details how a decedent wants his or her estate property to be distributed.  A will is subject to the probate process.  A will does not detail how non-probate property is distributed.

Your leases and the importance of September 1st

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An oldie but goodie post as Nebraska farmers approach September 1st:

There is evidence that in Nebraska, most farm leases are oral year-to-year leases.  This is important because Nebraska law governs how to terminate such leases and September 1 is a critical day should a landowner wish to terminate an oral lease.

First, the law:

The Nebraska Supreme Court has ruled that a farm lease begins on March 1 for oral year-to-year leases.  To terminate an oral year-to-year lease, however, the Court has ruled that six months notice must be given prior to March 1.  In other words, to terminate an oral year-to-year lease, a notice to quit must be received by the tenant prior to September 1 of the preceding year.

Second, some examples:

Example 1:

The landowner as an oral year-to-year tenant.  Landowner decides she wants to terminate her lease with Tenant because she wants her nephew to rent the land beginning March 1, 2014. Landowner sends a letter to Tenant and Tenant receives it October 30, 2013.  Is the lease terminated so the nephew may rent it on March 1, 2014?

No, the lease is not terminated because an oral year-to-year lease requires a tenant to receive notice by September 1, 2013.  Here, Tenant received noticed from Landowner on October 30, 2013.  This means that Tenant may lease the farm land until August 31, 2014.

Example 2:

Same facts as above except now, Landowner sends a notice to quit to Tenant, which Tenant receives on August 30, 2013.  Is this lease terminated so the nephew may rent it on March 1, 2014?

Yes, the lease will terminate as of February 28, 2014.  Keep in mind the lease between Landowner and Tenant continues through February 28, 2014 but the Tenant has received a proper six months notice of termination, which is required under Nebraska law.

Third, some gotchas:

The above represent the default rules in Nebraska for termination of unwritten year-to-year leases.  The landowner and tenant can come to a mutual, voluntary agreement to modify the default rules.  Thus, if both the landowner and tenant agree, an unwritten year-to-year lease may end in June with 30 days notice.  The key is that there must be a mutual, voluntary agreement to do so.

If a landowner is terminating an unwritten year-to-year lease, it is advisable to do so with a letter and not in-person.  Additionally, it is best to send the notice to quit with time to spare from the September 1 deadline, as the tenant must receive the notice by September 1; it is not relevant when the landlord sends the notice.

Moreover, the above rules do not apply to written leases.  To terminate a written lease, the landowner and tenant must merely review what the lease states about termination and follow the lease provisions.

If you need clarification or just want to ask about dates and deadlines, you are welcome to contact us.  We’re happy to help Nebraska and South Dakota’s farmers and ranchers (both landowner and tenant!).

Portability of the estate tax exclusion amount

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Due to the passage of the American Taxpayer Relief Act of 2012 (ATRA), taxpayers saw the portability election made permanent.  What exactly does this mean for the average Nebraska and South Dakota farmer or rancher?

First, we have to discuss what portability election is.  As you likely know, in 2013, every taxpayer has a unified credit of $5.25 million.  This means a taxpayer can pass at death or gift throughout his or her lifetime $5.25 million prior to the imposition of the estate and gift tax.  But what if a person does not use the entire $5.25 million?  In other words, what if the total assets of a person total $3.25 million?

Assuming you are married (sorry … this won’t work if you are unmarried), you have the option of making a portability election.  A portability election is a mechanism for spouses to ensure full use of each of their exemptions, totaling $10.5 million in 2013.  Portability allows a surviving spouse to use the deceased spouse’s unused exclusion amount for estate and gift taxes.

An example is the best way to understand the math of the portability election.  Assuming no other estate planning, the taxable estate of the deceased spouse is $3.25 million.  Most of that amount is due to the value of farmland.  The deceased spouse’s unused exclusion amount is $2 million.  The surviving spouse can then elect to “port” the $2 million unused exclusion amount, thus raising the surviving spouse’s exclusion amount to $7.25 million.

The election to port, however, must be done on an estate tax return for the deceased spouse.  This means an estate tax return must be filed even when no estate tax is due.  If you are filing an estate tax return solely for the purposes of a portability election, a good faith estimate of asset value is required.  The estate tax return is due nine months after the deceased spouse’s death, before any extensions for filing are requested (an extension is typically six months).

Why is knowledge of the portability election important?  Portability can function as a default estate planning tool to ensure the maximum exclusion amount between spouses is used.  No prior planning is required, unlike with a trust, will, or business entity.  It does require, however, the timely filing of an estate tax return after the deceased spouse’s death.

The portability election can be especially important as land values continue to rise.  The ability to transfer the deceased spouse’s unused exclusion amount to the surviving spouse may allow farm and ranch land to be transferred without imposition of the estate and gift tax.  As many farmers and ranchers know, land values are rising faster than the rate of inflation.  There may be a legitimate concern that the estate tax exemption, which is indexed to the rate of inflation, may not be able to keep up with land valuations.  Thus, while the taxable estate of the deceased spouse may not reach the estate tax exemption (in 2013, $5.25 million), the taxable estate of the surviving spouse may exceed the estate tax exemption because the rate of inflation is lower than rising land values.  Portability is a means to capture the deceased spouse’s unused exclusion amount, which may provide enough of a cushion to ensure the estate tax is not paid due to the combining of the surviving spouse’s exclusion amount and deceased spouse’s unused exclusion amount.

Other things to keep in mind: the portability election is for the deceased spouse’s unused exclusion amount.  If the surviving spouse remarries and does not use the deceased spouse’s unused exclusion amount and the second spouse passes, the surviving spouse no longer can use the unused exclusion from his or her first spouse.  Additionally, while it is likely that the portability election will remain in the tax code permanently, that can all change in an instant with new legislation.  Finally, there is no method to retroactively elect to port the unused exclusion amount — the election must be done in the nine months (or after any extensions have been been granted) after the deceased spouse’s death.

Portability may be an option or other “traditional” estate planning techniques such as trusts may be required.  Do you want to discuss the possibilities?  You are welcome to contact us for a one-on-one mentoring session, attend a workshop or attend a clinic.

Friday Facts, Fun and Food.

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Has this week been crazy-busy for anyone else?

If you haven’t seen it yet, check out this amazing video of Nebraska:

Whole Foods in Lincoln is hosting a local vendor fair.  The deadline to apply is today (sorry!).

The University of Nebraska – Lincoln is hosting a two-day No-Till Cover Crops Tour in Central Nebraska September 4-5, 2013.  More information is here.

Farm Safety for Just Kids $250 grant application is open until September 3, 2013 to fund safety-related project on the farm designed to improve safety for children.

Interested in the demographics of the American Farmer?  Or just interested in what I (among many other more articulate and intelligent people) have to say about it?  Check out the Harvest Media documentary here.

Interested in exploring social media?  Here is a good overview for farmers.

Wow. Imagine planting 1 million trees in the past 20 years. Read about the family who has done so.

If you are headed to the South Dakota State Fair at the end of the month, check out the South Dakota Wine Pavilion (with South Dakota beer and cheese too!).

Finally, if you can stomach it, try these Grilled Bacon Jalapeno Wraps.  Simple and tweak this recipe to suit your taste buds.

Common factors of beginning farmer success

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Courtesy of beginningfarmers.org, I learned of this project from Michigan State University on assessing common factors of success among Michigan’s Upper Peninsula beginning farmers.  The project interviewed eight beginning farmers and two supporting organizations to ask about, among other things, the challenges and opportunities for beginning farmers.*  What I found most interesting about the study were the responses from the two supporting organizations regarding:

  1. the most important factors of success among newer farmers; and
  2. the most common pitfalls newer farmer should try to avoid.

What struck me was the same themes in the answers to both questions.  Researching the market.  Persistence.  Organization/recordkeeping.  Calculated risk-taking.

With the possible exception of one of the above (persistence), the other themes are skills that can be learned by beginning farmers.  But how does a beginning farmer research the market, keep records, and decide when to take a risk with the operation?

Researching the market:

There is no one-size-fits-all answer to how to research the market because each market is different.  Do you want to establish an organic vegetable direct-marketing operation?  Or enter the feeder cattle market?  Maybe you want to establish a CSA?  Or perhaps row crops such as corn, soybeans, and wheat?  The possibilities truly are endless but that means different research is required for each possibility.

You must know the type of operation you want to run.  That requires making a business plan, even if it is a rudimentary one.  Research the cost of inputs (e.g. seed, fertilizer, livestock).  Research historical trends of input costs, productivity of the land, selling price.  Understand the possible federal, state, and local rules and regulations.  Talk with local producers about their operation and practices.  Determine how you will obtain access to land and how much land your operation requires.  With this research, you can determine how prepared you are to launch your operation but also, set the foundation to be persistent and become a successful farmer.

Recordkeeping:

We’ve discussed recordkeeping before but it bears repeating: without knowing the cost of your inputs, the cost of your time, and your break-even point, you will not be able to properly manage your operation.

Calculated Risk-taking:

This is the scariest proposition.  When do you look to expand your operation or change enterprises?  Are there value-added enterprises you may add to the operation?  Do you continue to rent or purchase land?  Do you have the resources and labor expand both your production and distribution capacity?  Can you live off the farm income alone or do you require an off-farm source of income?

To make those decisions, you have to return to research and recordkeeping.  Research and recordkeeping is critical to responsibly running your operation and knowing when it is possible to expand, when to consider changing enterprises, knowing whether production and distribution capacity are at their maximum, and knowing whether you are making a profit.

Want some help navigating the landscape?  Feel free to contact us because we’re here to help Nebraska and South Dakota’s beginning farmers and ranchers!

*The caveat to the study is that this is a small qualitative study focused on a small geographic region.  However, the study authors do you claim to extend their results beyond what the results state.  I am the person suggesting that the answers by the supporting organizations provide food for thought to all beginning farmers.