It takes more than the next generation’s willingness to farm to see your operation continue. It also requires estate planning.
Mid-Atlantic Women in Agriculture and University of Maryland Extension hosted “What Makes a Successful Succession Plan: Keeping the Family Together” as a recent webinar.
Paul Goeringer, Extension legal specialist with the University of Maryland College of Agriculture & Natural Resources, presented.
Goeringer said that an estate plan should include guardianship for minor children, beneficiary designations, powers of attorney for business and health-care decisions, advanced directive for health care, will, and possibly a trust or life insurance.
Though a lot to tackle, with the right professional help it can go more smoothly. Farmers need to communicate with their families so they know what they want.
“How are we going to structure the business so we can bring in multiple generations so the farm can support more than one generation?” Goeringer posed as a possible question.
Without an estate plan, state law divides assets, which may mean selling the family farm. For people contemplating divorce or who have estranged children or parents, Goeringer said the law doesn’t take their relationship status into account.
Any person 18 or older who is of a sound mind can make out a legal will. A witness must observe its signature.
“A will can be changed or amended by drafting a codicil that amends the earlier will or the person can draft a new will,” Goeringer said.
The second document still has to meet all the requirements of the first one.
“You cannot make margin notes,” Goeringer said. “You have to go back to the attorney’s office. We only care what was officially witnessed and followed the proper process. You can’t cross people off.”
Property outside the will includes life insurance policies where you’ve selected the beneficiary and payable-on-death bank accounts you have selected. Joint bank accounts and any property jointly held with rights of survivorship are also outside the will.
For some people, a trust can be a useful estate planning tool. Goeringer said that people with estates approaching federal estate tax limits (over $11.4 million for an individual and $22.8 for a couple in 2019); those who have minor children or a disabled family member to provide for their care; and family members that can no longer manage their own affairs, such as an elderly parent.
A will provides several advantages, including control of the property until death, control over who gets the property, selection of executor and guardians and the fact that once the property is distributed, the will is no longer needed. But wills also require probate, a time consuming and public process. They’re easily contested and their rules are state-specific.
A living trust eliminates the need for probate and remains private. That helps make it more difficult to contest. There’s no need for guardians to hold assets for minors, as the trust does this. But a living trust also likely has trustee fees. It adds complexity to asset management and it has to be coordinated with other estate tools. People with living trusts still need a will “to deal with property that’s not in the trust,” Goeringer added.
A durable power of attorney appoints an attorney-in-fact or agent to handle business and financial matters should you become incapacitated. The power lasts until the authority is revoked (such as your heart surgery is over) or at death.
The health care proxy is an appointment of an agent to answer health questions should you become incapacitated and unable to make your wishes known. This could include decisions about the removal of life-sustaining methods.
A living will, also called an advance health care directive, is written directions about your health care wishes concerning specific types of medical intervention you want or don’t want in certain situations.
“A living will takes the burden off the family,” Goeringer said.
He also thinks that more people should consider federal estate taxes. The exemption, tied to inflation, increases annually. In 2019, it is $11.4 million for an individual and $22.8 million for a couple.
It is also portable, allowing the surviving spouse to take advantage of unused federal estate tax exemption. The survivor has to file the appropriate tax forms and cannot remarry.
“For the most part, property passes to the surviving spouse tax-free,” Goeringer said.
The law varies state by state.
Gifts may pass to another individual tax-free if they’re $15,000 or less from an individual or $30,000 from a couple.
“With gifting there are strategies involved,” Goeringer said. “You may want to talk to your accountant before you do this because they can help you make wise decisions to limit your tax liability.”
That’s why Goeringer believes equitable disbursement is fairer than equal disbursement of farm property, especially when some heirs have been working on the farm for years and others haven’t.
As for farm ownership, “all the children can be a part, but with separate classes of ownership,” he said. “Communication is important in this process. If we never talk with the off-farm heir, they may want to be part of the farm.”
Though it’s not a “fun conversation,” Goeringer said, he also advises heirs and those blending families to consider a prenuptual agreement to help ensure their family’s farm property stays in the family and isn’t divided with an ex-spouse or stepchildren not related to the family.
Farm families should also revisit the estate plan during any major life or business change and at least annually.