Succession Planning for Family Farms

With over half of Indiana farm operators nearing retirement age, succession planning is essential for continuing a family legacy and a successful business. However, there are unique challenges that family farm owners face when considering their succession plan.

Unique Challenges

According to the Indiana State Department of Agriculture, roughly 53,600 farms were operating in Indiana in 2022, 94% were family-owned or run, and many have been in the same family for generations.

It may be challenging to name a successor if family farm owners want their businesses to remain in the family. What if multiple children want to continue farming – how to best structure the business for multiple owners? What if only one child wants to run the business, but the owner wants other heirs to have an “equal” inheritance?

Farms have most of their value tied up in illiquid assets, such as land and equipment, which can present a puzzle when equalizing inheritances. Introducing family dynamics and emotions into the planning process makes it easy to understand why some farm owners lack a succession plan.

Where to Start and Considerations

Having conversations early and often with family members is the best approach. Being able to spread decisions out over the years leading up to retirement provides more flexibility for involving the right people and resources.

Knowing how the operation is currently structured - sole proprietorship, limited family partnership, limited liability corporation – provides a starting point for knowing the types of legal documents that need to be in place to effect an ownership change and understanding the associated tax implications.

For example, Articles of Amendment and a Certificate of Existence are required to sell an LLC in Indiana. Selling a limited family partnership is generally treated as the sale of a capital asset, recognizing a capital gain or loss based on the difference between the proceeds of the sale and the adjusted basis in the partnership interest.

The farm owner should obtain an appraisal to know the fair market value of the land and operations. This is when all the records – survey documents, soil samples, operational records, deeds, etc. - that have been saved for decades will come in handy!

Involving professionals at this juncture can ensure the business is best positioned for sale, proper estate documents are in place, tax implications are understood, and the most advantageous discounts or appreciations are applied.

Just a sample of the questions the professional team can help answer: Is it beneficial to claim special use valuations to lower the taxable value? Is a trust the best vehicle for valuation discounts and simplicity of succession planning? Does the property qualify for a marketability discount? How much money is needed to meet retirement goals and achieve financial security? How can sale proceeds be optimally invested?

Selling or Gifting the Farm?

If the farm is staying in the family, the farm owner needs to weigh the benefits of gifting versus selling the business to their heirs. There may be tax advantages to gifting the farm, especially if done gradually through annual gift exclusions.

Here’s an example of gifting the farm: each year, a person can gift up to $19,000 (2025) per recipient without triggering federal gift taxes or using any of the lifetime exemption amount. Since Indiana does not have inheritance or estate taxes, this applies only to federal taxation.

A farming couple could make a gift of $38,000 worth of fractional interest in the land or equipment (one gift per farmer per year) to their child. This example stresses the benefits of starting the succession conversation early.

However, selling at fair market value or at a discounted rate can provide income for the retiring farmers. Selling the farm to the owner’s heirs can provide stable income, similar to an annuity.

Let’s assume the farm is sold to an heir for $1,000,000, with a $100,000 down payment and the balance financed over 20 years at 4% interest. The retired farmer will receive a steady stream of payments. The payments are taxed as return of basis (tax-exempt), gain on the sale (long-term capital gain in most instances), and interest income (ordinary income).

Conclusion

Selling a business involves a myriad of decisions and considerations – it’s easy to see why owners may procrastinate! Working through the details and getting the proper documentation in place, as early as possible, helps ensure the farm can continue for another generation.

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