You may have heard the old saying about how to eat an elephant. The answer is "one bite at a time."
It's a topic that comes up in strategic business planning conversations, and the point is to take things in stages – don't be daunted by the entire process. Just focus on the current goal.
Regular readers of this space may remember that we previously wrote about the idea of breaking up the farming operation in to smaller units as part of a legacy plan. In that conversation we focused mostly on the idea of providing income for you and your spouse to leave the business, and on identifying the best person to be responsible for each aspect of the operation.
Another benefit from breaking your farming operation into separate legal entities is that you can change ownership of different parts at different times and in different ways.
For example, real estate is often owned by a retiring couple with a rental agreement to the new operator so he or she can farm the ground. This gives the retiring couple income in retirement and allows the land to change ownership and receive a stepped-up cost basis at the death of the current owners.
But many times farm machinery or equipment, livestock, farm outbuildings and other facilities can represent a substantial asset that might be best transferred before death. These assets could be sold outright before death, but the income would flow to the retiring couple in a single year and could create an income tax problem. Oftentimes a long-term lease is used to spread out the flow of income to the retiring couple while also transferring ownership.
I recommend you consult with your tax advisor about the depreciation of various assets in your operation and the tax consequence of selling assets before and after death.
If this blog has got you thinking about your own situation, get in touch with my office ([email protected]).
The opinions of Rich Dunn are not necessarily those of Farm Futures or the Penton Farm Progress Group.Important information