Succession

Some Thoughts As We Begin the New Year

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As 2014 quickly fades into the rear-view mirror, now is a good time to reflect.  The past year saw a number of changes to the agricultural landscape for beginning farmers.  In no particular order:

  •  The Farm Bill passed early in the year with a number of provisions aimed at beginning farmers.  From increased lending limits on microloans to increased cost-sharing for EQIP contracts and revival of the Conservation Reserve Program’s Transition Incentive Program, beginning farmers have some new resources at their disposal.  As we enter 2015, and before the crop year begins, now is a good time to research how many of the updates in the Farm Bill can help with your operation.
  • The Nebraska Department of Agriculture launched new websites for the Nebraska Beginning Farmer Tax Credit.  The NextGen website contains all the information and forms you need to apply for the Nebraska Beginning Farmer Tax Credit.  The website also lists upcoming workshops and clinics for young and transitioning farmers and ranchers.
  • The 2014 crop year was one in which some beginning farmers and ranchers faced financial headwinds.  The 2015 crop year may intensify those headwinds.  However, one-on-one clinics to discuss financial concerns are available throughout the year.
  • New crop insurance products are rolling out, including changes in the Noninsured Crop Disaster Assistance Program.  These products will assist beginning farmers weather the headwinds identified above.  These products also address how beginning farmers are farming in today.
  • And last but certainly not least, ARC and PLC are coming down the pike.  ARC and PLC replace direct payments.  Now is the time to begin considering what product to enroll in for the best potential benefit to your operation.

The upcoming year has the potential to change your operation, in both positive and negative respects.  If you ever want to take some time to discuss your operation, your options, and what programs are available, feel free to contact us.

The Transfer on Death Deed … Say What?

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We’ve spent some time discussing taxation, contracts (and more contracts with some more contracts thrown in) but I want to turn our focus to estate planning issues.

As of January 2013, Nebraska introduced a new tool in estate planning — the transfer on death deed, or TOD deed.  This blog post gives an overview of the TOD deed but you are encouraged to speak with your attorney or contact us if you have further questions about TOD deeds or estate planning generally.

What is a TOD deed?  It is a deed filed with the Register of Deeds in the appropriate county that allows real property (e.g. land) to transfer upon the owner’s death to the beneficiary designed on the TOD deed.  A TOD deed does not require probate because it is considered a non-probate transfer, just like bank accounts or life insurance policies with beneficiary designations.

What are the requirements?  The TOD deed is only for real property, such as land or residences.  The property must be in the State of Nebraska.  The person transferring the property must be an individual acting only as an individual.  The designated beneficiary may be an individual, corporation, estate, trustee of a trust, partnership, limited liability company, association, joint venture, public corporation, a government or governmental subdivision, agency, or any other legal or commercial entity.

The TOD deed must be signed by the transferor and two disinterested witnesses.  At the same time, a Notary Public must be present to witness all three persons and their signatures on the TOD deed.  The transferor (person make the transfer) must have the same capacity as the capacity required to make a will.

When is a TOD deed filed?  Per Nebraska law, the TOD deed must be filed within thirty days at the appropriate county office where the real estate is located.  If the TOD is not filed within 30 days of its execution, it is invalid.  Additionally, the TOD deed must be filed prior to the death of the transferor.

What if I change my mind?  The TOD deed may be revoked.  Because the TOD deed does not transfer real property until the death of the transferor, the TOD deed may be revoked.  The transferor must filed a revocation of the TOD deed in the same appropriate county office within 30 days of executing the revocation.  A divorce automatically revokes a TOD deed if the now-divorced spouses are a transferor and beneficiary respectively.

In short, the TOD deed is a tool in the estate planning toolbox.  Each specific estate plan requires different questions and considerations.  Thus, feel free to attend our workshops or contact your attorney for further information about your estate planning goals.

Maybe leasing land isn’t a bad option?

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I was planning a different topic today but the release of the Kansas City Federal Reserve’s Main Street Economist Report “Financing Young and Beginning Farmers” caused me to reverse course.

Of interest to me in the report is that more beginning and young farmers are turning to lease agreements to enter farming or ranching.  This is not surprising given the economic conditions discussed in the report: higher fixed costs, higher land costs, and higher debt-to-income ratios for beginning and young farmers.  But entering farming or ranching via leasing may not be the worst idea.

First, leases allow a beginning farmer to cultivate a relationship with a landowner.  This relationship, especially if it is with an established farmer or rancher, can lead to mentoring and education for the beginning farmer.  You have the opportunity to learn from someone, ask for advice, and develop a mentor/mentee relationship.

Second, leases allow for flexibility with changing market conditions.  Leases can be drafted so the beginning farmer shares the risk with the landlord.  Thus, if the drought continues or commodity prices dip, the beginning farmer will not be locked into a debt repayment; instead, there is flexibility in the lease price if the lease is drafted to share risk.

However, even if the lease is not drafted to share risk with the landlord, a lease provides more flexibility than debt repayments.  Instead of being obligated to repay the purchase price for a parcel of land, you may be able to stagger your leases so they are renewable on different dates, allowing you to determine which parcels of land provide the most bang for your buck and let go of parcels that are not producing to your standards when the lease ends.

Third, at least in Nebraska and Iowa, there are tax programs available for landlords who rent to beginning farmers.  These tax programs can be a strong incentive for landlords to rent to a beginning farmer and beginners should consider approaching possible landlords with a lease proposal with these tax programs incorporated into the proposal.

There are risks with leases, namely that the landlord will not renew the lease.  As a result, a beginning farmer has to weigh the risks and rewards of a lease with the risks and rewards of ownership.  Keep in mind your debt-to-income ratio, especially when considering purchasing land.  Your debt-to-income ratio affects everything from whether you can obtain a loan to what interest rate will be used to whether you will qualify for future loans you may need/want, such as for machinery.  In short, beginning your operation with a lease may allow you to build up a nest egg to purchase land at more attractive terms than would be possible without the lease.

To know whether it is better for you to lease or own depends upon financial knowledge of your operation.  As discussed earlier this week, that requires good financial recordkeeping.  And to know whether you are obtaining good lease terms also requires knowledge of the income your operation generates, meaning you need good financial recordkeeping.

Need some help deciphering the above information or perhaps need some help drafting a lease or purchase agreement?  Then contact us — it is what we are here for!

Friday Facts, Fun and Food

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As another week comes to a close, our thoughts are with those in Oklahoma.

Study concludes that internet access increases small farm gross income approximately $2,200 to $2,700 per year.  For purposes of the study, small farm was defined as a farm with a gross cash farm income of $250,000 or less.

Here’s an interesting post on the progress of corn planting but why we are below the record pace of planting.

The ACRE deadline is approaching quickly — the deadline to apply is June 3.

SDSU offers its drought outlook for South Dakota.

Farmers especially should consider estate planning sooner rather than later.  As part of that consideration, this is a great overview of why to involve the entire family during estate planning.

Interested in free ice cream?  Then head over to the University of Nebraska – Lincoln’s Food Processing Center on East Campus on June 9 from 1-5 p.m.  Also available are tours of the Center’s pilot plants, as well as interactive displays on sensory testing, marketing, food safety, and more.

Want something a little different for Memorial Day weekend?  May I suggest Lime Marinated Grilled Chicken?

Gifting as business succession

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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.