Succession plans can assure farms stay in the family


Issue Date: October 19, 2016
By Christine Souza
Margaret and Sib Fedora, center, at their Sutter County walnut orchard with sons Brian, left, and Chris, right, recommend farm families develop estate plans to address how assets will be distributed from one generation to subsequent generations.
Photo/Christine Souza

Exactly how a family farm or ranch will be transferred from one generation to the next can be costly, confusing and difficult. Some families address this challenge as soon as children are born, but others just haven't gotten around to it yet.

Why the delay? There are many reasons people fail to establish a farm succession plan, including that it can be complicated and time consuming, fear of conflict, unwillingness to ask for help, cost concerns, and farmers simply don't want to accept their eventual exit from the farm.

Attorney John Guth of Yuba City, who specializes in estates and trusts, said being without a succession plan "could be disastrous for heirs when it comes to control of the assets and taxes." That's especially true, he said, if dividing the estate could lead to conflict.

"Saving taxes is one thing," said Guth, who has developed estate plans for 44 years, "but to allow your children to be in a fight or litigation with one another is about the worst thing you can do."

Sib and Margaret Fedora—who farm walnuts, run a custom harvesting and hulling and drying operation with their sons, and own property in Colusa and Sutter counties—are very familiar with the estate planning process. Sib served as executor for several estates and Margaret worked for years as a legal secretary in an office that handled probate cases.

The Fedoras developed their first estate plan more than 20 years ago, to protect the future of the farming business and secure assets for their sons Brian and Chris—and now, for their four grandchildren.

"This is the biggest challenge that people have to face, because they don't want to give it away; they've worked hard," Margaret Fedora said. "I've seen lots and lots of tears because estate planning was not done, it wasn't done timely or correctly a lot of times, and the people suffered."

The Fedoras have set up a generation-skipping trust, in which assets are passed down to grandchildren rather than children, although the children may earn income generated by the trust's assets. With this type of trust, Guth said, the children may change the terms of the distribution.

"In our case, Brian and Chris have full control of the assets after we are gone, but then there are no taxes at that point until it goes to our grandchildren," Sib Fedora said.

For children who are working and contributing to the farm, it is important they have the control they need to avoid disputes. Sib Fedora said he knows of a situation where one brother remained working on the farm, while siblings worked off the farm.

"The parents thought assets should be split up equally, so when they died, the sisters said, 'We want our share,' and the farming brother had to sell everything," Sib Fedora said. "You need to consider these things."

For parents who want their children to be treated equally, but to keep the farm operational, Guth suggested the family set up the property in a corporation, a limited liability company or LLC, or a partnership, in order to establish who is the general partner, who has the majority interest and who is operating manager.

Another way to make non-farm children equal is through purchase of a life insurance policy. By purchasing an irrevocable life insurance trust, Guth said, the proceeds remain outside of the estate; parents would feed the trust every year with enough money to pay the premium, but when that is paid off after their death, it would be outside of their taxable estate and not subject to the 40 percent tax.

People should also be aware of portability of the federal estate tax exemption between married couples. This means, Guth said, if the first spouse dies, and the value of the estate does not require the use of all of the deceased spouse's federal exemption from estate taxes, the amount of the exemption not used for the deceased spouse's estate may be transferred to the surviving spouse's exemption. That way, he or she can use the deceased spouse's unused exemption plus his or her own exemption when the surviving spouse dies.

The Fedoras said it is worth it to hire a qualified estate attorney who is certified by the State Bar of California.

"If you have a lot to lose, you have a lot to gain by getting it situated correctly and having it updated," Margaret Fedora said.

She added that she knows firsthand what can happen if a trust is not updated. In the case of her father, who died in January, she said he had looked into updating the trust in 2013, but hadn't wanted to spend the money required.

"There were some serious problems with the distribution and division of assets," she said. "There were a couple of pieces of property that could have been easily passed on or disposed of without a lot of additional attorneys' fees and costs."

Developing an estate plan and keeping it updated can be challenging, said Josh Rolph, federal policy manager for the California Farm Bureau Federation, especially in light of changes in estate-tax law that could be proposed by a new administration and Congress, and a current proposal by the Internal Revenue Service that would change the way business assets are valued for estate tax purposes.

Under current IRS rules, the value of inherited family business assets can be discounted or reduced because of a lack of marketability or a minority discount. The IRS proposes to eliminate a common practice of discounting stock of minority shareholders in family-owned operations. The regulation, if approved, could make it much more difficult for family-owned businesses when assets exceed the current per-person limit, Rolph said.

CFBF supports legislation pending in both houses of Congress—H.R. 6100 and S. 3436—to block the IRS proposal. Rolph said supporters want the measure added to an overall spending bill Congress must pass by Dec. 9.

"We can't let this regulation make it even more difficult to keep the farm in the family," he said.

(Christine Souza is an assistant editor of Ag Alert. She may be contacted at csouza@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.