Legal Issues Affecting Farm Transitions IFMAPS In-service training - April 26, 2013 Dr. Shannon...
-
Upload
job-barrett -
Category
Documents
-
view
214 -
download
0
Transcript of Legal Issues Affecting Farm Transitions IFMAPS In-service training - April 26, 2013 Dr. Shannon...
Legal Issues Affecting Farm TransitionsIFMAPS In-service training - April 26, 2013
Dr. Shannon Ferrell Dr. Rodney Jones
Oklahoma State UniversityDepartment of Agricultural EconomicsAssistant Professor, Agricultural Law
OK Cooperative Extension Service Area Extension Agricultural Economics Specialist
Outline
• Elements
• Tools
• Barriers
• Conclusions
Why should I care?
Founding Generation
Second Generation
Third Generation
Fourth Generation
30%12%
3%
Iowa Farmland Ownership by AgeSource: Iowa State University Extension (Duffy and Smith, 2008)
1982 1992 2002 20070%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2
6
15
22
27
28
>74 years65-7455-64 years45-54 years35-44 years25-34 years<25 years
• 55%
Challenges for the Aging Farm Owner
Perspectives for the closely-held farm business
Family
LegacyBusiness
Assets
Female:80.3%
Male: 19.7%
Widowed Persons by Gender (AARP, 2001)
Why should I care?
Why should I care?
3x to 4xPoverty rate of widows compared to same-age married women
Why should I care?
55%Percentage of U.S. adults with
no estate plan in place
Elements of Transition
Founder
Successor
Elements of Transition
Founder
On-farm heir
Off-farm heir
Unrelated Successor
Liquidation / Dissolution
Ownership
Control
Participation
Separate Entity
Elements of Transition
Founder
On-farm heir
Off-farm heir
Unrelated Successor
Liquidation / Dissolution
Ownership
Control
Participation
Separate Entity
Elements of Transition
Founder
On-farm heir
Off-farm heir
Unrelated Successor
Liquidation / Dissolution
Ownership
Control
Participation
Separate Entity
Tool What it does Consequences
Intestate Succession
Default plan; allocates and transfers property at death
•Zero up –front cost•Excludes all outside family•No decedent control
Will Instructions for disposition of property at death
•Property held until death•Probate issues•Does its job, then quits
Trust Legal entity that holds and manages property
•Highly flexible•Requires trustee•Irrevocable/rigid at death
Estate Tools
Tool What it does Consequences
Life Insurance
Financial instrument paying amount on death
•Can add liquidity and/or enhance estate•Question of taxability•Cost : benefit?•Planning horizon?
Transfer on Death deed
Conveyance triggered by death of grantor
•Property held til death•Avoids probate•Not universally adopted or understood
Estate Tools - Others
Tool What it does Consequences
Joint Tenancy w/ Right of Survivorship(JTWROS)
Cotenancy that redistributes ownership interest of decedent among survivors
•Avoids probate•Reduces flexibility during life•Unintended consequences
Life Estate
Present interest to holder, remainder interest to successor at death
•Avoids probate•Reduces flexibility during life•Requires cooperation
Ownership Tools
Tool What it does Consequences
Sole proprietorship / general partnership
“Organic” form of business; no separate existence from owner
•Business as entity ceases upon ANY change to owners•Unlimited liability that is personal, joint, and several
Limited Partnership (L.P.)
Separate entity consisting of general partner(s) and limited partner(s)
•Limited liability for limited partner (rule evolving)•Limited management participation by limited partner (rule evolving)•Questions re: liability/participation of partners
Business Entities
Tool What it does Consequences
Corporation (Inc.)
Separate legal entity with limited liability for all owners
•Did we say limited liability?•Well-recognized rules governing control•Allows flexibility in transfers•S/C Corp. taxation•Must follow formalities
Limited Liability Company (L.L.C.)
Separate legal entity with limited liability for all owners
•All advantages of corporations w/ more flexibility•Flexibility of tax treatment•More than enough rope to hang yourself
Business Entities
Tool What it does Consequences
Installment Sale
Purchase of property by successor with payments over time
•Allows seller to recognize income from sale over time•Remove property from estate•Seller may retain security interest•Buyer may lose step-up in basis•What if default occurs?
Long-term lease
Transfer of property possession and control to lessee w/ retention of ownership by lessor
•May be structured in number of ways to allow more/less participation by lessor•Does not remove property from estate•Structure of lease dictates tax treatement
Transactional Tools
Barriers – Tax Policy
The State of the Federal Estate Tax
• 2013 estate tax credit:–$5,250,000 per individual with
annual inflation adjustment–$10,500,000 effective credit per
couple–40% maximum rate
“Spousal Portability”
• Surviving spouse gets unused portion of
first decedent’s credit
• Carter and Barbara: husband and wife
• Carter dies, uses $3 million of his credit
• Barbara’s estate can pass $7.5 million (her
$5.25 million credit + Carter’s unused
$2.25 million credit) estate tax-free.
Barriers to Implementation
• Communication• Equitable considerations
– Farm kid / city kid– Sweat equity
• Willingness to transfer
Perspectives for the closely-held farm business
Family
LegacyBusiness
Assets
Conclusions
• Producers, we can transfer it. We have the
technology.
• Do producers and professionals
understand the tools and their impacts?
• Are producers willing to engage in true
transitions?