Dear Michael: We have been following your columns for quite some time now. Recently you wrote about how to get the transfer process going between us and our farming child. When is it a good time to start this process? – Between The Devil and the Deep Blue Retirement.
Dear Retirement: Many of my clients are coming to me now – especially now that tax time has just finished – and saying, "I can't quit buying things now – I have too much income built up in the farm operation."
True enough, one of the luxuries turned necessity of the past few years is many people now have quite an operating allowance built into their farming operation. In other words, they either have grain, or they have the sales from the grain, or they have the pre-paid expenses from the grain, or they have operating paid for, or they again have grain. The last few years have allowed farmers to have quite a tidy sum rolling around in their operation – money that used to be in the form of operating loans each year. By using their own money, many farmers are saving tens, if not hundreds of thousands of dollars in interest payments to ag lenders.
If someone were to step out of the operation suddenly, then all this internal operating money would then become taxable to that person. Hence, the cycle repeats itself over and over again, with extra money used for machinery replacement.
All I can tell you is there are only three ways out of this cycle and two of them are bad. One is to reach an age where you suddenly quit and you are hit with a tidal wave of income. Two, you can suddenly die and your spouse and your estate is going to get hit with this same income and have no room to maneuver.
Many people spend a great deal of time worrying about paying estate taxes. "Oh my God, I don't wanna pay any estate taxes", when the real thing they should be looking at is how much income tax their estate is going to pay. In most cases, the income taxes dwarf any estate taxes, but people reason them away by saying "Well, whoever's left can pay that share of the income taxes if they receive the income". I've seen people stand on their head to avoid two hundred thousand dollars of estate tax, but totally ignore having to pay half a million dollars or more in income taxes.
The problem is a poorly planned estate is going to overpay in income taxes – and with the new tax rates, the additional taxes on unearned income to pay for Health Care, and the problems of resolving all this, most families are going to get hit hard.
One of my clients said to me, "I can't do this now – I'm making too much money to quit buying equipment and paying expenses!" I replied, "Would you rather do it when you are poor?"
Isn't it better to begin this process when times are good then to wait until a bad cycle arrives and your child, and your farm operation, may not have the money to do the transition necessary? Or forced upon you by death or disability?
We have a unique, quite possibly, once-in-a-lifetime cycle occurring in farming right now. The rest of the country has been dry, we've had bountiful crops, and the prices have never been better. Isn't it better to start the transition now when you're on top then waiting until things inevitably change?
Now, if my farming child is in the middle of a divorce or a nasty marriage, I wouldn't transfer property. If he's wholly incapable of making good decisions with money, such as buying a camper or other toys with the extra income earned lately, rather than machinery, I'd give pause.
However, if you haven't pointed out to him or her that this is their future and they better buckle down and focus on taking over the farm operation, then you're the one to fault for them not having better ways to spend their money.
If you just automatically buy new equipment in your name, or if you continue to rent all the acres in your name, if you continue to do what you've always done, it's hardly their fault for being unfocused right now. We need to lead by both example and by slowly letting go of the things necessary for your farming child to continue to farm – and some of the income sources necessary to pay for them.
Little by little is the third method of transferring property – and it sure beats the heck out of someone having to quit or someone died and having to face the mountain of income taxes when that happens. It's just not smart business to ignore this problem and it's getting bigger by the year.