Dear Michael:

We have a two-fold problem. My son has been farming with us for years and has his own set of machinery. He would like to buy us out but we’re still fairly young at fifty-nine and fifty-eight. One problem we have now is that we have everything pretty much paid for – with the exception of annual costs such as seed, fertilizer, etc. – the only way we seem to be able to escape income taxation is to keep buying new machinery each and every year. We’re giving almost twenty percent of our income to Uncle Sam each year.

Second, we would like to set up a program where our son could buy us out, but for him income taxes would then be a big problem also as the payments to us, except for the interest, are not deductible.

It seems no matter which way we turn, one or both us and our son are going to give up close to a quarter of our income each year?

– Taxed and Vexed

Dear Taxed and Vexed:

The good news is all the tax benefits that President Trump provided for you last year (2018) are likely not going to help you this year. Many farmers had bumper crops but prices were lower. The tax breaks from last year helped a great deal.

Most farmers don’t spread out their depreciation because they always think they may have a bad year the next year and their depreciation will be for naught. However, if they have good income, they are stuck buying more depreciating assets, such as machinery, to escape taxation. They get stuck on the ‘hamster wheel’ spinning around just waiting for the wheel to come off.

Perhaps this might be a solution for you: If you’re reaching the age when buying machinery is no longer a viable solution for you and your son doesn’t want to lose his tax deductions, you might consider a combo plan using elements of defined benefit (pension plan), deductible buy-out options for your son, and an insured plan to guarantee the benefits.

Under this plan, both you and your son can make tax deductible payments. Your son’s contributions would be considered payments towards purchasing the farm. If you should live, you and your spouse will receive a monthly pension for the remainder of your lives. If you should die, the pension is self-completing creating both non-taxable and taxable pension for your spouse. You reach age sixty-five or seventy – whenever you decide it’s time to trade farm assets for the tax-deductible pension contributions your son has made, plus interest earned – and you turn on your pension payments.

Or you might opt to take these funds and give them to your non-farming children in lieu of receiving farm assets they might have had their eyes on as part of their inheritance. You can do this while you’re still alive or after your death.

Many people buy life insurance to help their farming child buy out the other non-farming heirs. Under this scenario, all life insurance would be tax deductible to either or both you and your son. If you should die, only the portion of premiums you deducted would be taxable and the remainder would be tax free.

There’s a multitude of variations on such a plan and is customizable for each and every situation. The biggest benefit? Being able to deduct all contributions to the plan, flexing those contributions during good times and bad, and building assets which grow in value in lieu of trapped into buying machinery each year, losing money over time.