Organize your farm business: Sub S corp eases estate planning worries

Organize your farm business: Sub S corp eases estate planning worries

The Sub S Corp works well as part of farm family's long-range estate planning strategy (part 2 of 2)

Read part one, Organize your farm business: Sub S corporation simplifies ownership

At the Vogel Seed farm in Rockport, Ind., three separate enterprises are managed by four family members in two generations, and there are eight family owners in all. A Subchapter S Corp business structure serves as the umbrella business structure as ownership moves from generation to generation.

"Everybody has their own responsibility here," says Eric Vogel. "It's important because then everyone knows what their job is and things run smoothly. Everyone doesn't have to be an expert on everything." Photo by Mike Wilson.

Back in 1980 Jeff's father, Larry, was juggling a seed dealership along with grain and livestock enterprises. He set up a Subchapter S corporation on the advice of an estate planner. Now all assets, including land and machinery, are in the S corp. That business structure continued to make sense as the farm grew these past three decades. The Subchapter S uses trusts to reduce estate taxes.

"With the Subchapter S, we're passing along shares, not acres or equipment," says Jeff Vogel, who farms with brother-in-law Kyle Wilkerson along with Jeff's son Eric and Kyle's son Alex.

Back in 1980 the farm had 30 beef cows, some feeder pigs, the seed dealership and 1,200 acres. Today, the cow-calf herd has tripled to 100 head and is using mostly artificial insemination, but moving more toward embryo transfer. The farm sells registered Angus bulls and club calves. The herd will likely grow to 120 head this year. 

Related: Feeling Exposed: Farm Liability, Part One

"Our goal is to replace AI with ET [embryo transfer] because AI takes a lot of time," says Alex." We really like the results we're getting with ET so far."

The farm now has 3,600 acres of corn and soybeans, with a growing emphasis on technology, including variable-rate seeding. The crops are mainly in a 50-50 rotation, with some continuous corn and as much no-till as possible.

The families own about 40% of the total land in the operation. On rented land, they have a combination of cash rent and crop share rental arrangements, depending on the preference of their landlords. The seed dealership grew to add bulk seed, storage and soybean seed treatment "on demand." Most customers go for the full package of two fungicides, insecticide, inoculant and a biological to stimulate growth, says Jeff.

"We can put that on right before they pick it up," he adds. "You can order it pretreated, but some only lasts on the seed 90 days, so the inoculant needs to stay fresh."

The family used a local attorney for initial setup, and now works with his granddaughter at the same firm.

Positives and negatives of a Sub S Corp >>

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Jeff Vogel believes the Subchapter S structure has positives and negatives.

"For example, we are only allowed one Section 179 capital purchase deduction," he explains. "If there were two or three of us with sole farm ownership, then everybody could have that deduction."

On the other hand, the Subchapter S can pay annual dividends if the stockholders agree. Those only get taxed once, unlike a C corporation, says Jeff. Partnerships and LLCs are different.

Another potential advantage is for livestock enterprises that require a manager on hand every day; you might be able to include housing in the corporation and deduct some electrical costs.

Related: Ag equipment partnership helps farmers find common ground

By law the S corp must declare a president, have a corporate book, hold meetings and take written minutes at those meetings. At the beginning of every year, the farm will do an internal appraisal of all assets, which sets the value per share for the year.

But the key advantage, says Jeff, is estate planning. At some point in the future, those with more ownership can begin gifting so many dollars worth of stock to their children. Some shares can be gifted as part of earnings, other than salary.

"It's not money you can spend, but it is ownership in the farm," says Jeff. "If you start doing that early enough and are lucky enough to live long, a lot of my ownership stake will be transferred by the time of my death."

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