Estate Planning for Farmers and Ranchers: Myths & FAQs

Myth

I don’t have enough assets to worry about estate planning.

This could not be further from the truth. While you may not have some of the more traditional assets, such as life insurance or retirement accounts, you definitely have enough assets to worry about estate planning.

Given the nature of your assets and the fact that you, and possibly other members of your family, rely on these assets to produce income, they should be protected. Doing nothing could force your family to either sell the farm in order to divide your estate amongst your heirs or compel an heir who has no interest in farming to be involved in the business.

FAQs

What if I just add my son (who is also working on the farm) to the deed for the land and the title to the equipment? Won’t that avoid probate and automatically transfer the assets?

While joint ownership does cause the surviving owner to receive 100% of the ownership upon the passing of the other owner without court intervention, it can create more problems than it solves.

First, by adding your son to the deed for the land and the title to the equipment, you are now subjecting these assets to any current or future creditors or judgments that your son might have. Should he get divorced, those assets will be seen as partly his and subject to division during the divorce.

Second, because these assets represent most, if not everything you own, is your son the only person you want to benefit? Do you have a surviving spouse that will now be left without income? Do you have another child that will effectively be disinherited because there will be nothing left to give him or her? While adding your son to the deed and title ensures that he can continue his livelihood, is it coming at the expense of others?

Third, by adding your son to the deed now, during your lifetime, you make a gift that could result in a higher income tax consequence. Your son may have to pay more in capital gains tax if he needs to sell all or a part of the land at some point in the future. This is because your tax basis (the dollar value of the land when you bought or inherited it) goes along with the gift to your son. Capital gains tax is calculated on the difference between the basis and the sale price, which could be a high number if your basis is low.  In the alternative, if you transfer the land through your estate plan, your beneficiaries get a “stepped-up” basis to the fair market value of the land on the date of your death. The capital gains tax on a sale has less of an impact, depending on the timing of a possible sale.

Fourth, making a gift by adding your son to the deed means that a gift tax return is required if the value of the land exceeds the $15k annual gift tax exclusion amount. Your lifetime-combined gift and estate tax exclusion is $11.4 million, but the IRS wants a gift tax return, even if you don’t owe any tax, so that IRS can keep count of your lifetime gifts.