Be it as it may, and depending on the circumstances, there are certain legal and succession planning points that will need to be evaluated when deciding to retire. I could write several pages on this, but below are some of the highlights. It is important to remember that we did not get to our current situation overnight, so retiring from farming generally does not happen overnight.
- Income Requirements: I’ve always said farmers do not have 401k retirement accounts, but rather a 401L, with “L” standing for land. Obviously, if a person is going to retire, and cash rent the land, income generated by the land, minus expenses, needs to leave the retired farmer with enough funds to live on. In addition, it may not be a bad idea to consider how varying levels of income impact eligibility in programs like Medicaid and Medicare. One other suggestion is that if a family member is going to be cash renting the land, it is still very important to have a written lease agreement. I’ve seen too many situations where the next generation fails to pay mom and dad for cash rent, and because it is a family member, mom and dad have a tough time collecting.
- Selling Farm Ground: Currently, selling farm ground will incur a capital gain tax. The tax will be computed based upon the basis of the land (i.e., What you paid for it or the value when you inherited it) and the sale price. Basis can be raised by verifying certain improvement that have gone into the land. Capital gains may be somewhat offset by doing a structured sale spread out over a few years. The bottom line is before deciding to sell farm real estate, a person should discuss the tax ramifications and know full well what they will amount to.
- Depreciation Recapture: This is a tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation. Farmers generally take aggressive depreciation and farm equipment and other farm items usually have been fully depreciated, but still can be worth substantial amounts. Selling items that are fully depreciated can generate tax consequences. Before selling equipment, get an idea of what the tax ramifications will be.
- Structured transfers: If a person is lucky enough to have a member of the next generation take over the operation, or an interested third party, sometimes a structured sale/transfer is beneficial for all parties. Under a structured sale, payments to the new operator can start off low and gradually increase. In addition, a structured sale can help with tax ramifications for the seller. Setting up an LLC or other type legal entity can allow the seller to stay in control as ownership passes to the new operator. Simply stated, a structured sale can be not only highly beneficial, but sometimes may be the only way to pass on the farm.
- Finding someone to take over: Sometimes farmers put off retiring because there is no one to take over their operation. However, spreading the word in the community, utilizing the internet, and so forth will often generate interest. If you do find someone interested in taking over your operation, it is crucial to have a written agreement that lays out everything clearly. Verbal agreements get forgotten. Have the agreement in writing, and make sure the goals, expectations, and contingencies are clearly defined. Having a mediation clause is beneficial so if the parties get crossways with each other, there is an attempt to mediate before heading to the courthouse.
In closing, sometimes retirement from farming comes on fast, sometimes it comes on slow. No matter the speed, it is always a good idea to consider some of the legal and tax ramifications of retirement, and have a plan to address them.
John J. Schwarz, II, is a lifelong farmer and farms with his family near Stroh, in Northeast Indiana and has been an agricultural law attorney for 12 years. He can be reached at 260-351-4440, our contact form, or visit him at www.farmlegacy.com. These articles are for general informational purposes only and do not constitute an attorney-client relationship.