Gary Hachfeld (left), a University of Minnesota Extension educator, discusses estate planning at a recent meeting in Urbandale with Terry Schnirring of Perry.

By DARCY DOUGHERTY MAULSBY

Farm News staff writer

URBANDALE – In a perfect world, a farm transfer can occur over a period of years, the retiring generation is willing to turn over control of the business and provide support, when necessary, and the succeeding generation can establish a financial footing and develop management skills.

While the process is rarely seamless, the transition can proceed much more smoothly through proper estate planning.

“These are your assets that you’ve worked for all your life, and you want to make sure they go where you want them to,” said David Bau, a University of Minnesota Extension educator, who spoke at a recent farm transition and estate planning workshop hosted by the Wealth Enhancement Group of West Des Moines.

There are a number of transfer strategies to consider, including:

Farming together. This is often a “trial period” in which the younger generation is hired for a wage. This arrangement allows the older generation to test the younger family members’ skills and assess their ability to contribute to the farm business.

It also tests the parents’ ability to let go of the operation, in addition to helping the younger generation decide if farming is the right career path for them. “This can be a good way to start, but it should be a short period-maybe two years,” said Gary Hachfeld, a University of Minnesota Extension educator.

Multi-owner farming/joint venture. Both the older and younger generations own some assets separately and purchase other assets together, owing a percentage of these assets.

“This can become complicated, however,” Hachfeld said. “Each piece of machinery has a different ownership percentage, which can make a buyout more difficult.”

General partnership. This is a fairly common arrangement, Hachfeld said. It should have a written partnership agreement that specifies the partnership’s name, outlines the goals and purpose of the partnership, details the assets included in the partnership, specifies a separate checking account for the partnership, defines check writing responsibilities, details capital contributions and labor involvement, and addresses other decision-making responsibilities.

In addition, the written agreement should outline the details regarding withdrawal from the partnership. In a general partnership, the partners are self-employed individuals who are subject to self-employment tax. “Since each partner is fully liable for the debts and obligations of the partnership, this is a downside of this arrangement,” Hachfeld said.

Limited liability partnership. Forming a limited liability partnership is an option when the parties involved desire different partnership participation. For example, general partners manage the partnership and have unlimited liability, while limited partners contribute assets only, with limited liability based on the assets contributed.

Land can be placed into an LLP or excluded from it. In general, profit or loss distributions need to be made in the same proportion as the LLP ownership percentages. An LLP also allows for the market value discount of assets, although the Internal Revenue Service is scrutinizing LLPs for discounting, Hachfeld said.

Corporation. A corporation offers continuation and longevity to a farm business through several generations, since individuals can enter and leave without disruption. The corporation provides liability protection not available to the self-employed individual. However, land should not go into a corporation, due to tax considerations, Hachfeld said.

Limited liability company. This is a hybrid that functions as a partnership with regard to taxation, but works like a corporation with regard to limited liability protection.

“We’re seeing more of these all the time,” said Bau, who noted that an LLC can include one or more shareholders. In the farm transition process, exiting and entering generations are shareholders. In addition, the exiting generation can sell, gift, or pass through the estate, their LLC shares to the entering generation.

“If one of your estate planning and farm transition goals is to minimize liability, put this option on your checklist,” said Bau, who advises farm families to work with their attorney, accountant and insurance provider on estate planning.

Since a farm transition plan should provide for the complete transition of the business, it may cover a period of 10 years or more. “Don’t forget that the plan should be reviewed and revised, when necessary or appropriate,” Bau said. “Above all, communicate clearly with family members and your professional advisors throughout the farm transition and estate planning process.”

You can contact Darcy Dougherty Maulsby at yettergirl@yahoo.com.