Dear Michael: Recently, you talked about using grain, grain contracts, livestock as a part of what might be considered ‘non-farm’ assets. However, if something should happen to us, our son would need to use these so that he wouldn’t have to borrow so much money against his operating costs. After all, he helped us put these assets aside…

Dear Michael:
Recently, you talked about using grain, grain contracts, livestock as a part of what might be considered ‘non-farm’ assets. However, if something should happen to us, our son would need to use these so that he wouldn’t have to borrow so much money against his operating costs. After all, he helped us put these assets aside – how do we tell him we want to use these assets to go to his non-farming siblings? – Grains Held.

Dear Grains: Over the last decade, farming has gone through an evolution of sorts – and whether or not it’s temporary or permanent remains to be seen. This will be especially true this year with the late planting season. If the late planting – or no planting – leads to higher values on farm commodities this coming fall and winter, there are plenty of farms with enough set aside commodities to make more money on the grain they’ve held then what they would have done farming. I have clients who make two hundred thousand dollars or more when wheat rises by a dollar. All indications are – if this wet, rainy system persists, crop prices are going to rise dramatically this fall.

Ten years ago, it was one in a hundred farmers who had enough grains set aside to pay for their operating costs for the coming year. Ninety-nine percent of farmers/ranchers systematically borrowed their operating costs each spring without even thinking about it.

Nowadays, with the current farm market, more than half of the farmers I talk to have a rolling fund in their farms – whether it’s in prepaid expenses in December, or seeding costs in the spring, or harvest costs in the fall – the money goes from being in the bank to being in the ground to being in the bins to back into the bank. Ten years ago, this was unheard of – today, it’s become a part of the way you do business.

As such, many farmers feel they should hand this rolling stock over to their farming child when s/he takes over, it’s now ‘part of the operation’. Well, before we just go about this willy-nilly, you better take time to add up just how much money this rolling fund has become. In my experience, it can be hundreds of thousands of dollars.

When all the kids are sitting around – after your deaths – and looking at the accountant and lawyer’s balance sheet of your estate – you don’t think they’ll notice that Jr. just got hundreds of thousands of dollars they didn’t receive? It used to be it was no problem, because the crop balance was normally equal the remaining operating costs for the past year. Now, it’s the operating costs for the coming year, so instead of an asset minus an equal debit in the estate, we have a pure asset. Many farm families have two to five years of operating costs set aside in advance and are moving the money around.

Then we have the other side of the coin. Many farm families state that if they should die, the non-farming children will receive these types of assets in lieu of receiving farmland.

This is okay except for many farm couples consider the crops they have held, or contracts pending, or deferred payments at full market value. One thing they fail to factor in is all of these will be included in the decedent’s estate for income tax purposes before they’ll go to the children.

This is akin to telling your non-farming children they will receive your IRA, Keogh or some other type of retirement plan money and they find out, when you die, they have to pay income taxes on these retirement funds – so it’s funds minus income taxes. The one benefit is they can opt to stretch out these payments over time.

The same is not true of all of the grains held, grain contracts, deferred payments, government payments, calves to be sold, etc., etc. When this all flows into your estate in the year of your death and you’re not around to use the techniques you’ve used in the past to defer taxes on these funds, guess what? The estate is going to lose forty percent or more of these assets in federal and state income taxes.

The new tax in farm estates is going to be income taxes rather than estate taxes and, in some cases, these taxes are going to be far, far higher than what estate taxes would have been. Estate taxes were at least limited to thirty-five percent – not so with income taxes.

In any case, whether or not you leave these type of assets to your farming child or to your non-farming children, it’s something that’s worthy of paying attention to within your estate planning. Grains held, grain deferred, government payments have grown to such a huge number, they can no longer be taken for granted. Keep on reading if you want to “Keep The Family Farm In The Family”.