Many farmers find it difficult to get any interest from their children in continuing to run the farm business – which can cause some complications when developing the best estate plan for farmers looking to retire.
In general, farmers are in an interesting position: they are asset rich due to the increased value of their land but struggle with the increasing costs related to their farming activities.
However, if the farm holds significant value but the children are not interested in working the land, what is a farmer to do?
In some cases, at least one child is interested in farming having grown up in it. If there is only one child interested in taking over the farm, the solution may be simple: gift the farm to the child.
If a child is taking over the business, parents should consider the following:
The timing of when the parents will retire.
When they will transfer the ownership.
Where they will live after retirement.
Whether or not they have enough retirement savings without relying on farm income.
If no children are willing to take over the farm business, estate planning and the tax implications become more complicated. However, farmers have some tax planning tools they can use that are unavailable to most people:
There is actually a higher exemption from capital gains for both farming and fishing individuals. While qualified small business corporations can claim about $892,218 against capital gains on shares, farmers have an exemption of up to $1 million on either qualified farm property or shares in a qualified farm corporation. This is a really great benefit for sole proprietors or partners in a farming operation.
In addition, if a farmer is passing farm property over to a child, they may elect to transfer at the original cost base, rather than the current fair market value. This is essentially passing the gains over to the next generation – much like an estate freeze without all the documentation.
Qualified Farm Property
In order to receive the right exemptions for your situation, it is also beneficial to understand what is considered qualified farm property.
In order to receive the right exemptions for your situation, the property must be used for active farming activities – not rented out or sharecropped.
It is also important to consider who actually owns the farm and if they are actively farming the property. For example, if two spouses own the farm property and farm it then they both get $1 million of exemption. If a spouse is not an owner but is actively farming the property, the current owner can transfer farm property over to the spouse at cost to allow for the use of the exemption. Children may also qualify for this exemption.
The current rules have two important provisions:
The owner must be actively farming for two years before selling or gifting the property, and the owner must have earned most of their income from farming during those two years.
Any other income earned from other sources has to be significantly less than the total gross income earned from farming.
If this is not the case, then there may be no exemption and no ability to gift the farm to a child at cost.
It is also important to consider what year the farming property was first acquired, as the rules prior to 1987 were significantly different.
The rules after 1987 state that farm property must be used to conduct farming, and it must be owned for two years prior by the individual, spouse, common law partner, children or parent of the individual, a trust or partnership.
However, if a farmer owned the property prior to 1987, then the rules are a bit more generous. For farms acquired prior to 1987, the tax authorities allow you to use the tax benefits if you used the property “principally” for active farming in the year you sold or gifted it, or in at least five years during which the property was owned.
Questions to Outline Future Goals
Finally, probably the most important step a farmer can take in planning their estate is to determine their own goals and ask their children about theirs. Some questions to consider:
If the children are interested in farming, can the parents afford to retire without farm income and if not, how many people can the farm support financially?
If there are both farming and non-farming children are there other non-farming assets that the parents can leave to the non-farming children to equalize the estate? Would life insurance be useful to provide equalization?
Do the parents need the children to “buy” the property, for at least $1 million of it to take advantage of the exemption and get the parents retirement funds? And can the children afford to do that?
Questions? Reach out if you are interested in exploring estate planning options.
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