Is Coming Big Turnover in Landowners a Risk or Opportunity?
August 15, 2011
Source: Des Keller
Progressive Farmer Contributing Editor
During planting delayed by rain this last spring, Bob Metz reflected on the fact that he represents the fourth generation working some of the several thousand acres the family farms in eastern South Dakota along the Minnesota border.
"Something we [along with wife Karen] decided was that if either or both of the boys wanted to come back and farm, they needed a college education, and they had to work somewhere else for at least two years," Metz says. Thirty-four-year-old Justin Metz worked for several years for Target stores, while Joshua Metz, 31, specialized in precision farming for a Case IH dealership.
Now the three families raise crops together, and the Metzes enjoy watching their nine (there is a daughter and son-in-law farming nearby, as well) grandchildren grow up in close proximity. Surely the sixth generation of this operation is digging in the yard right now.
Though Bob and Karen Metz have plenty of career ahead of them, they have worked hard and planned for an operation that could allow children and grandchildren a chance at this livelihood.
That some of the Metzes' farmland will change hands--if only to family members--over the next two decades is nothing unusual. A USDA-financed study completed in 2010 estimated that as much as 70% of all U.S. farmland will change hands over the next 15 years. That's more than 640 million of the country's 922 million acres of farmland.
Though the percentage figure may not be airtight, a large amount of land among the country's 2.2 million farms will be bought, sold or inherited relatively soon. The average age of U.S. farmers has been climbing for the past 30 years and rose from 50 years of age in 1978 to 57 by 2007.
Between 2002 and 2007, the Census of Agriculture shows the number of principal farmers in the U.S. aged 65 and older rose by 18%. Farmers aged 45 or younger declined by 21%. In Iowa, 55% of the farmland is owned by someone older than 65, and 28% is owned by someone older than 75.
Cause For Concern?
"I look at it [older landowners] mostly as an opportunity," Justin Metz says. He has purchased two parcels of land in recent years, one from a retiring farmer and the other from older non-farmers. Both made it a point to sell to someone in the immediate community.
If rural communities don't retain enough young people, they deteriorate, Justin Metz says. Fortunately, the attitude that it's good to help younger farmers seems to be prevalent in the region, and the two brothers have plenty of healthy competition from others who want to farm the land.
That is not the case nationally. "It is a demographic trend that bears watching," says Jerry Cosgrove, an estate-planning attorney and author of Your Land Is Your Legacy, a book published when he worked for the American Farmland Trust (AFT). "Anytime there is a transition, the land is at risk in a large sense." The AFT already estimates the U.S. loses 2% of its productive farmland every year to development.
The risks, from Cosgrove's perspective, include the land being sold for development as a result of squabbles among farm and non-farm family members. He doesn't believe that new, higher estate tax exemptions beginning this year--$5 million per person and $10 million per couple--necessarily do farmers any favors. He contends many people will put off estate planning believing it is not necessary.
The primary reason to plan an estate is not necessarily to minimize taxes but to affect a smooth transfer of the operation and set a vision for what the business should become down the road.
Plan For Future
Cosgrove gets no argument from Kevin Bearley, who specializes in estate and tax planning for the Kansas-based national agricultural law firm Kennedy and Coe. A year ago, the law was written such that estate planners expected the estate tax exemption per person to revert to $1 million as of 2011. Instead, Congress and President Barack Obama raised the exemption to $5 million and cut the estate tax rate on amounts above that to 35% from 55%. "Those changes have made estate planning a bit of a hard sell," Bearley says.
The reality is that the higher exemption, along with the ability to gift more assets tax-free and discount the value of the business for tax purposes, have made this a great time to make some moves for the future.
The $5 million per person estate tax exemption is
set to expire Dec. 31, 2012. "Nobody expects it to stay at $5 million," says Bearley, the implication being that a financially strapped federal government will lower the exemption.
"Today, the main reason people are selling land is to settle an estate," says Illinois-based Brent Bidner of Hertz Farm Management. Otherwise, he isn't seeing that high a turnover between non-family members. [Note: The 70% turnover figure is based on sales/gifts to family members as well as non-family.]
There is no consensus as to what such a large change in farmland ownership will mean. "I'm not so sure the turnover in ground is the end of the world," says Darrell Dunteman, a farm financial consultant and editor of the "Farm and Ranch Tax Letter." In areas of Illinois, many farmers don't own any land and are great stewards.
Even more land would be selling, Dunteman says, if potential sellers didn't have to worry about paying tax on the basis. Generally, a seller pays tax on the difference in price when acquired versus when sold.
Philosophically, Cosgrove would prefer a world in which more farm operators were actually the farm's owners. "In my view, agriculture and society would be better off in that instance," he says. A farmland owner in his 70s and 80s manages the land differently than a person in his 20s, 30s or 40s.
Under those circumstances, "ownership patterns don't coincide with the productivity curve," Cosgrove says. Additionally, the increased estate tax exemption and the step up in basis for those who inherit the land are real incentives for owners to hold onto the ground until they die, Cosgrove says.
With two sons in business growth mode, Bob Metz doesn't mind the notion that a lot of farmland will be sold in the years ahead. "I don't see it as a negative," he says. "Certainly if you have a landlord getting up in age, you know at some point the land will change hands. You have that in the back of your mind and keep enough cash in reserve."
Keep the Farm in Farming
Tax incentives should be offered to landowners who sell or lease their land for farming, according to the recommendations from The FarmLASTS Project, conducted from 2007–2010 through USDA (www.uvm.edu/farmlasts). That was one of numerous suggestions made by the report's authors, who emphasized succession planning and land conservation in their findings. Additional measures include the following:
Examine tax laws for barriers to farm transfers. For example, eliminate the self-employment tax on share leasing.
Allow farm operators with succession plans to have priority access to programs, such as the purchase of developmental rights or other farm viability benefits.
Promote farming and ranching on public lands by methods like increasing the length of leases. Encourage public land managers to support agricultural uses.
Articulate national policy objectives for agricultural land tenure that will serve as a framework for USDA.
Trusts for the Long Haul
Estate planners have a variety of sophisticated tools available to help ease the transition of assets from one generation to the next while minimizing any taxes that have to be paid. The "perpetual trust" and the "intentionally defective irrevocable trust" are two such tools getting more attention now.
As the name implies, perpetual trusts (also known as dynasty trusts) are trusts that can remain intact beyond the life of the person who created them and shield heirs from tax consequences. States have varying laws regarding such trusts, with some allowing a trust to continue 21 years or so beyond the death of the youngest beneficiary alive at the time the trust was created. Others allow for 1,000 years.
Opinions regarding the value of such trusts vary widely, with some estate planners hesitant to strap future generations to today's circumstance.
The intentionally defective irrevocable trust is a device that can freeze the value of assets contained within, thereby reducing possible estate taxes down the road. The creator of this trust must report annual income from the trust, but its assets are not included in their estate. The creator, or grantor, of the trust can sell assets into the trust in exchange for a note (like an installment sale). This move essentially freezes the value of the asset at the time of the sale.
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