Gone are the days where estate taxes were minimal, where there was always an heir or heirs that wanted to carry on the farm, and long term health care was just a rocking chair and an aspirin. Farmers didn’t need a retirement plan in those days. Now days, Midwest farmers are faced with a very different situation.
Generally Congress has been fairly generous to the family farm with regards to the federal estate tax. In 2003, an Indiana family could shield 1 million dollars from estate taxes. In 2009, that number increased to $3.5 million each. For 2017, the estate and gift tax exemption is $5.49 million per individual, up from $5.45 million in 2016. That means an individual can leave $5.49 million to heirs and pay no federal estate or gift tax. However, the exemption amount is always subject to change. Even if the total farm estate is below the federal exemption amount, a good succession plan will take into account for changes to the federal estate tax exemption. Else, the estate may end up paying as much as 40% in estate tax.
These days, only a portion of the heirs usually desire to continue the farming operation. Farming doesn’t appeal to the next generation and they would prefer Benjamin Franklin over owning a piece of dirt or machinery. The difficulty becomes creating a succession plan that treats all heirs as fair as possible, but ensuring the heirs that value the farm can continue its operation.
Also, people are living longer today, which means long term health care is more of the norm. All of us should be well aware that this long term health care does not come cheap. The challenge becomes making sure we can afford such care, but not drain away the assets of the farming operation in the process.
Essentially, the perfect storm has now come together where farming operations face the same succession difficulties that other businesses face. Sadly, the future of farming in this country will be shaped by how well the current farm population plans for succession. Simply put, the number of viable farms in this country will be determined not by how successful the farming operations are in terms of yields, acres, prices, etc., but by how well current farmers plan to transfer their farming operations to the next generation.