Transferring Your Farm Assets
Roland P. Freund, Regional Farm Management Agent, Pa.
November 1, 2001
This is the second in the series on farm business transfer. In the previous article we posed the question: “Will your family farm continue?” and discussed the factors which might make that possible. Building equity in the hands of the next farming generation is the most important thing that a family can do to ensure that the family farm will continue.
The farm is a very complex business. Transferring it is normally not just a matter of signing over a bunch of stock in “Farm Incorporated.” In most cases we need to divide the farm into its component parts. Each of these parts can be transferred separately. A different timeframe and a different strategy can be considered for each part. The farm can be divided into some basic categories:
1. The business operation
This is the heart and soul of the business. It is the annual production of crops and livestock and milk. It includes everything that we list under annual income and expenses on the Schedule F. of our tax return. Inventories of inputs and product, and the accounts receivable and payable are included. Only assets and liabilities in the “Current” section of the Balance Sheet are included.
It is possible to transfer the operation from one person to another party just by opening up a checking account and a new account book in the new party’s name. All the assets listed below can be leased or hired. Feed and input inventories can be purchased as needed by the new operation from the old owner.
The next generation should get some ownership, management responsibility and authority in the operation soon after they are committed to the farm or at least by age 30. This gives them experience in cont rol of the production and finances of the business. How this can be organized and accomplished will be discussed in our next news article.
2. Breeding livestock and machinery
These are the assets where the junior generation can easily build substantial equity. Dairy cows in a herd are turned over every 3 or 4 years. Farm machinery on average is replaced about every 10 years. Old cows and machinery can be leased by the new operation.
The business agreement can specify that from the start of the new business all heifers (calves?) born will belong to the new operation. From a specified date all machinery will be purchased by the new operation. Then after 4 years most cattle, and after 10 years most machinery will be owned by the new business.
3. Buildings and structures
These are depreciable assets. If there is any remaining useful life they can be leased from the owners by the new operation. The land and these structures are often owned by grandparents while grandkids are running the operation. There is nothing wrong with that.
But it is important that any new facilities, built and paid for by the new operation, be owned by the new business. The structures should not add to grandparents’ estate just because they stand on their land. This will require some negotiations with lenders and special legal agreements to make this possible. That’s better than to make junior buy his own facility from a family estate.
4. Farm residence and land
These should be the last things on the ownership priority list of the younger farm generation. They can generally be leased for a fraction of the mortgage payment to purchase them. They are good things for the grannies to hold onto for security and retirement income. Until Federal Estate Taxes are eliminated, they get a stepped-up basis in granny’s estate.
When they are in a sound financial position, having built sufficient equity, the junior generation should purchase the neighboring farm - if that fits the plan for the future of the business. This will keep it totally out of the parents’ estates.
Farm transfer vehicles
In the final installment of this series we will discuss business structures which can facilitate the transfer process. We will also talk about the implications of sales and gifts.
