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Your Planning Can Save Family Farms

When our daughter Savanna was 4, we visited my wife’s parents at the family farm. As lunch rolled around, my father-in-law came in, grumbling, “I’ve had it with the problems on this farm! I am going to sell and get out of here.”   
At this, Savanna walked up to her grandfather, looked up at this imposing man and said, “Oh, no, you’re not, Pop Pop! Because when I grow up, I want to have this place and come here to play with my cousins.” Hearing this, her grandfather lowered his head and simply said, “OK.” Before that, I don’t know how many times the old man said he was going to sell. I only know that he never said it again.

Savanna had the courage to tell her grandfather what he most wanted to hear – that his years of hard work and sacrifice had formed a legacy to preserve for those he loved.

Inspired by Savanna’s courage, I began the conversation with my in-laws about preserving their legacy. As a result, we saved the family as well as the farm. If you doubt that both were at stake, consider this quote in High Plains/Midwest Farm Journal from a professor at the University of Nebraska who said, “Forty years ago, I lost my family and farm over these emotional issues.”


As a life insurance agent, you can provide a great service to members of your community who own a farm or a ranch by helping them with their succession planning. You can be the catalyst to get the family to begin the conversation on this vital topic. To give you some idea of how important this is, the U.S. Department of Agriculture reports the average age of a farmer/rancher is 57.1 years, and the fastest-growing age group is those who are 75 years and older. To put the size of the problem in perspective, 2.2 million farmers dot America’s rural landscape.

Although 97 percent of farms are operated by families, the American Farm Bureau Federation reports that only 11 percent of those farm families have a transition plan in place. The consequence of this lack of planning is that 70 percent of first-generation operations do not transition successfully to the next generation, while 90 percent of second-generation operations do not make it to the third generation, according to AgChoice Farm Credit.

The first thing to remember when starting a conversation with farm families is that they don’t like being sold to. Rather, you need to develop a relationship in which they see you as a resource, educator and problem solver. To accomplish that, begin by asking them personal questions such as:

  • How did they get started in farming?
  • What was the most difficult challenge they faced?
  • What is their greatest accomplishment?
  • What is it like to raise children on a farm or ranch?

After you have established a trusting relationship, you must determine the family’s goals and objectives in making the transition to the next generation. As with Savanna and her grandfather, there must be a dialogue between the owner-operator and the subsequent generations. The senior family members should not assume that they know what the younger generations want. You could hit on some very touchy issues, but these must be addressed if the family will determine realistically whether they can and want to keep the operation for subsequent generations. Use the following questions as guidelines in helping the family start the dialogue:

  • Does the next generation have the experience and skills needed for the challenges of farming or ranching?
  • Does the senior generation trust the capability and commitment of the next generation to take over the operations?
  • Will the senior generation be willing to relinquish control at some point?
  • Can the senior generation financially afford to retire?
  • Can the current and next generations get along while running the farm or ranch together?
  • Can the farm or ranch provide enough income to support those who want to stay there?

One area in which life insurance can provide a role in farm succession is when families have some children who want to remain on the farm and other children who do not want or should not receive an interest in the farm. One alternative for being fair or equitable to the off-farm children would be for the parents to purchase life insurance through an irrevocable life insurance trust (ILIT) and make the off-farm children the ILIT beneficiaries.

Another way in which life insurance can help in succession planning is for parents to sell the farm or ranch to the children through a buy/sell agreement funded with life insurance. If the sale takes place during the parents’ lifetimes, the cash value of the policy can serve as a down payment with the rest of the purchase price made up of installment payments. Alternatively, if the sale takes place upon death, the purchase price may be covered by the death proceeds.

Assuming that the owner-operator decides to keep the farm or ranch in the family, when selecting a transfer technique, there are three possibilities to consider: outright gifts, gifts of an interest in the trust and sale of the farm or ranch to one or more family members.

As to an outright gift, there is the question of whether the farmer or rancher can afford to make the transfer, and if so, what the gift tax implications of such a transaction are. Besides the $14,000 gift tax annual exclusion, each individual has a gift tax applicable exclusion of $5.43 million in 2015. This means that for most families, gift tax exposure on the transfer will not be a problem.

Considering the recent acceleration in agricultural land values, however, some families could face gift taxes in making such a transfer. Consequently, if gift tax exposure is an issue, the parents should consider restructuring their ownership interests to take advantage of valuation discounts for lack of marketability and lack of control.


For example, assume a couple has two sons to whom they want to give a farm that is worth $20 million gift-tax-free. One approach would be to establish a family limited partnership (FLP) and then transfer the farm to it in return for partnership interests. Then, using their annual gift tax exclusions and gift tax applicable exclusions, the couple could gift partnership interests to the sons. Without discounts, they could transfer $10,916,000 to the sons in 2015 gift-tax-free. With a 35 percent discount, however, for lack of marketability and lack of control, they could transfer $16,793,846 gift-tax-free to the sons.

By restructuring the farm ownership as an FLP subject to valuation discounts, the parents can give the sons an additional $5,877,846 gift-tax free in 2015. Since the farm is worth $20 million and the parents could give only $16,793,846 tax-free in 2015, they have another $3,206,154 to give the sons. They could do that in subsequent years using their annual gift tax exclusions.

This returns to the question of what the parents should do if there are other children in the family who do not want or should not receive an interest in the farm. The parents could consider giving the off-farm children a passive interest in the farm by incorporating it and giving the off-farm children non-voting stock while giving the two operating sons voting stock. That way, the two operating sons would control the farm and run it as they please while the rest of the children still would have an ownership interest. Generally, this is a bad idea because the children receiving a passive interest are not likely to receive any income from the operation, would still have tax reporting issues to deal with and would have an interest they could not sell to realize anything of economic value from the farm.

Although a better alternative is to set up an ILIT to benefit the non-farm children, just because the two operating sons received a farm worth $20 million does not mean that the parents need to buy $20 million in life insurance for the off-farm children. The objective is not to make the children’s situations exactly equal but instead fair or equitable. Their circumstances are not the same, because the two operating sons have to work the farm to gain the economic benefits while the off-farm children do not have to do anything to collect the death proceeds in cash.

If the parents cannot afford to give the farm to their children as an outright gift, they might consider the alternative of giving it to them through a grantor retained annuity trust (GRAT). The parents would establish an irrevocable trust to which they would transfer the farm or ranch in return for an income interest for a period of years. Then, at the end of the parents’ income interest, the trust could terminate and the remainder interest (farm or ranch) could go to the children.

The advantage to the parents would be that they would receive an income stream from the trust for the designated period, after which the farm would go to the children. When the trust is established, the remainder interest designated to go to the children is a gift that may be offset by the parents’ gift tax applicable exclusions.

For example, assume that parents transfer a farm worth $1 million to a GRAT in return for the right to receive 4 percent or $40,000 a year for 10 years. Assume further that the present value of that income stream is approximately $350,000, which makes the value of the remainder interest $650,000. Under such circumstances, the parents could offset the value of the gift of the remainder interest against their $5,430,000 gift-tax-applicable exclusion in 2015 and pay no gift tax.

Further, if the property happened to earn a rate of return in excess of the government discount rate used to determine the present value of the children’s remainder interest, the gift would be undervalued for gift tax purposes. For example, if the farm earned 7 percent a year for the 10-year period, the children would get approximately $1.4 million even after the trust paid the father $40,000 a year. That would be more than double the $650,000 value placed on the gift of the remainder interest that was offset against the parents’ gift-tax-applicable exclusion.

Besides gifting their farm to children, parents can consider selling it to a grantor trust for their benefit. The parents set up a trust with certain provisions that cause it to be characterized as a grantor trust. Typically, those features would permit the trustee to insure the grantor, loan money to the grantor or trade assets with the grantor.

The result would be that transactions between the grantor and the trust would be ignored for income tax purposes. In the next step, the grantor would seed the trust with a gift of assets equal to 10 percent of the value of the farm or ranch that is to be sold to the trust. Subsequently, the farm or ranch is sold to the trust for a series of installment notes. The reason for the preliminary gift is that the parties will want the transfer of the farm or ranch to the trust to be characterized as a sale rather than a gift. Consequently, padding the trust with an extra 10 percent of assets makes it look like a sale because the trust has assets over and above the farm or ranch with which to pay off the installment notes. Otherwise, if the Internal Revenue Service determines that the farm or ranch alone cannot service the debt, it will characterize the transaction as a gift rather than an installment sale.

In any case, the trust pays off the installment notes with the income from the farm or ranch plus income from the gifted property. The advantage to the parents is that, because the trust is a grantor trust, they may ignore any gain from the sale of the property.  

Unless your farming or ranching clients have someone who can bring up the subject of succession planning, they are likely to keep on keeping on with abysmal odds against their keeping the property in the family. Worse yet, the failure to deal with succession issues ultimately can have a bad effect on family harmony. This means that by failing to act, they are betting the family and the farm with the odds of a favorable outcome stacked against them. Tell them this, and help change the odds.


Louis S. Shuntich, J.D., LL.M., is director, Advanced Consulting Group, Nationwide Financial. Louis may be contacted at [email protected] [email protected].

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