Estate and Business Succession Planning with Farm Program Payments
Volume 5 • Issue 10 • October 2015
The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. In this month’s issue, we will discuss estate planning and business succession planning involving farm payments. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.
When establishing an estate plan or business succession plan for farmers or ranchers, one of the issues that must be addressed is participation in one or more farm programs. The 2014 Farm Bill continues the long standing existence of rules that govern eligibility for participating farmers and ranchers. Failure to take these rules into consideration when creating a plan can result in adverse and unintended consequences.
A maximum per person dollar amount has been established for each program that can be received annually, either directly or indirectly, by each person or legal entity. For example, Conservation Reserve Program (CRP) payments are limited to $50,000 per person or $100,000 for land owned jointly by a husband and wife. Consider the example of Bob and Sue who own a parcel of land that is potentially eligible for $80,000 in CRP program payments. If the land is owned solely Bob’s name, they will only receive $40,000 in CRP payments. However, if the land is titled in both of their names they will receive the full $80,000 in CRP payments. Bob and Sue talk to their attorney about asset protection planning and he recommends that the land be transferred to a limited liability company (LLC). Transferring the land to the LLC will again result in them only receiving $40,000 in CRP payments. What can Bob and Sue do if they want to receive their full CRP payment, but also have asset protection? They could consider holding the land in a General Partnership that is in turn owned by two single member LLCs, one for Bob and one for Sue. This will allow them to have the asset protection they desire, but also receive the full $80,000 CRP payment. A General Partnership is not considered a separate entity and therefore each individual partner can receive up to the maximum per person distribution. When using multiple levels of entity ownership, it is important to keep in mind that there must be an individual owner (as opposed to an entity) by the fourth level of ownership. Failure to do so will result in a reduction in payment. For example, if Bob’s LLC is owned by Holding Company LLC, which is in turn owned by an irrevocable trust with Bob as the beneficiary, Bob will not receive his $40,000 payment because you do not reach the individual taxpayer until the fifth level of ownership. June 1 is the date for determining the ownership interest that a person or legal entity holds in a legal entity for the current year.
In addition to the payment limitations, there are also annual income limitations. If combined farm and non-farm annual adjusted gross income exceeds $900,000, farmers are not eligible to receive payments or benefits from most programs. The choice of entity can make a difference in determining whether the AGI limitations are exceeded.
Actively Engaged in Farming
An additional requirement to be aware of is the “actively engaged in farming” requirement. “Actively engaged in farming” means individuals or legal entities must provide significant contributions to the farming operation to be eligible. The contributions could consist of capital, land, and/or equipment, as well as labor or management. Each person with an ownership interest in an entity must contribute active personal labor and/or active personal management to the farming operation on a regular basis. How can this issue arise in planning? An often used planning technique is segregating land ownership from operations by using a separate entity for each – for example, Landowner LLC and Operations, LLC. If Landowner LLC leases land to the Operations LLC for cash rent, Landowner LLC is not eligible to receive farm program payments. On the other hand, if Landowner LLC leases land to Operations LLC for a share of the crop, Landowner LLC can share in the portion of the farm program payment equal to Landowner LLC’s percentage share of the rent.
If you are a farmer or rancher who benefits from farm program payments, it is vital that you inform your advisors of the same. Failure to adequately consider the ramifications of planning on these benefits could result in a substantial decrease in payments available or even a total loss of eligibility. Consider using qualified advisors in assisting with your estate planning and business succession planning needs.
This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.