Dear Michael: I have been farming with my parents for the past twelve years. However, every time dad and I need something new, he has to buy the machinery or land that we need to expand because I don’t have the credit. Now he’s past retirement age, and with the income over the past few years, he’s really been into buying new machinery and more land to offset his income tax. We’ve had to increase the machinery because of all the land he rents
Dear Michael: I have been farming with my parents for the past twelve years. However, every time dad and I need something new, he has to buy the machinery or land that we need to expand because I don’t have the credit. Now he’s past retirement age, and with the income over the past few years, he’s really been into buying new machinery and more land to offset his income tax. We’ve had to increase the machinery because of all the land he rents – although we farm that together. Is there a better way for him to be doing things so I can own something someday? – Waiting In the Wings.
Dear Waiting: One of the byproducts of the recent success in farming is that many older farmers suddenly have money they’ve never had their entire farming career. Of course, with this sudden increase in income, they also are facing income taxes they’ve never faced before either. It’s a little like someone hitting the jackpot – these older farmers never, ever expected this type of income and when faced with the taxes, they jump at buying anything that will solve their tax problems. Of course, buying machinery solves two issues for them – one being income tax and the other having new equipment – so it’s an understandable situation.
What I don’t understand is why more of these older farmers, who have farming children, aren’t using some of this new income to solve the transition problems they are facing now and in the future.
By simply going out and increasing the value of their farm operation with machinery and land, it has the side effect of making it much more difficult for their farming children to ever take over the farm operation. Many people have wills that state their children will buy out the other children’s share of the machinery, the land, etc., etc. but no one has factored in the fact that machinery values have tripled or quadrupled in the past four to five years alone. One has to remember that when it comes time to buy this machinery, the lenders are not going to be offering twenty-year loans to purchase a million dollars worth of equipment. Most equipment loans are much shorter – five to eight years – and interest rates are much higher.
So, yes, it’s nice to have new machinery to drive, but if something happens to Dad and Jr. is expected to buy up all the machinery Dad bought in the last five years alone, Jr.’s probably not even going to qualify for the loan.
Instead, because Dad and Mom should be set on income for the next few years (many farmers now have one to four years of crops deferred at the elevator) now is the time to make giant strides in solving some of these transition issues.
Why not move that rented land all to Jr.’s name and let him farm this land. We solve two problems with this. One, if Dad dies the land isn’t going to be put up to the highest bidder because you’ve already replaced Dad’s name on the rental agreement with Jr.’s name and life continues with the landlords. At the very least, at your dad’s age, the rental agreements should be in both your names.
Second, more income is going to be going to you from the rented land, therefore lowering Dad’s gross income and now you can buy the next piece of machinery you are replacing. Dad’s income tax will be lower because he doesn’t have as much income, but his net will still be the same and now the new tractor, combine, bailer, etc. is in your name and you don’t have to buy out your brother’s and sisters someday. It’s seems to simplistic, but all you have to do is move some items around in the way you farm and start accumulating assets in your name instead of your parent’s name. They need to be adding machinery past retirement age like they need a hole in the head. Conversely, if you don’t start building your own balance sheet, you won’t have anywhere near what your parents are retiring on when you retire.
The same is true with land. If land comes up for sale, rather than having Dad pay for the land, you should be buying the land. If you need to borrow the down payment from Dad (he has all the money), go ahead and do this. Sign a contract with him that if you miss a payment, he gets to assume the remainder of the loan and take over the land.
I don’t understand why older farmers won’t allow or won’t help their farming children build their balance sheet. It is, by far, the worst estate planning mistake I see these days – Dad and Mom’s balance sheet tripled in the past five years – Jr.’s grew by half – and a set of non-farming children just salivating on the sidelines about how things are going to be divvied up some day.
Everyone thinks their children will be different – their children will allow the farming child to continue – their children will be nice to one another. Imagine if you will that your children are playing a version of musical chairs, walking around a round table until the music stops. In the center of the table is a pile of money – one million, two million, three million – all stacked up in the center of the table. Suddenly, the music stops. Do you envision your children being nice to each other as they reach for the money – or do you see them – much like in the fun version – knocking each other down to grab for the money before the others get it?
The truth of what will actually happen upon your parent’s death will be somewhere in the middle of these two extremes – being too nice to each other and knocking each other down. Where your family will fit I don’t know – but err in planning on the rough scenario. You want to know where you stand when the music stops.