What is in this article?:
- Donâ€™t bet your farm: An estate plan can help preserve assets
- International buyers pushing up values
- Consider family differences
- "Given the outlook for further growth in land prices in the coming years, and the increasing value of equipment, buildings, grain bins, and other assets, I can promise you: if you don’t have an estate plan, you’re going to get hosed by the IRS,” says Ed Gillentine, a Certified Financial Planner and Chartered Financial Consultant, who spoke at the annual meeting of the Mississippi Land Bank.
International buyers pushing up values
International investors are now buying U.S. farm land and pushing up prices, which can also have an effect on your farm, he says.
“The Argentine/Chinese/European investment money that’s coming here is typically limitless. That’s why they’re buying land here — they can’t spend it all in their own countries. Their purchases will drive up prices of land in the area, which will boost the value your land.
“If you’ve been paying property taxes based on land value of $1 or $2 million, and the value increases to $4 million or $5 million because international investors are bidding up prices, where are you going to get money to pay the tax bill?
“You typically only have 5 months to 9 months to pay property taxes, so if you’re not doing some planning for adequate operating cash, you could be in trouble and might have to sell some land at fire sale prices. As my grandfather used to say, ‘You’ll be in deep weeds.’
“I’ve seen the tax returns of many who didn’t plan,” Gillentine says, “and they often were facing large amounts of estate tax on a farm that they had worked their entire life to build. The problem, if you go over the exemption limits, is that you’ve then got to come up with 40 percent of the value of the assets for Uncle Sam.
“And I can tell you, the IRS likes to value such assets fairly generously. If it’s farmland that’s been in the family for generations, in an area where there haven’t been many land transactions to provide a basis for establishing value, the IRS will set the value — and they may set it far above what you think it should be.
“You don’t want to put the next generation in this predicament. Can you imagine your children, to whom you want to pass your farm, being confronted with a huge estate tax bill and no way to pay it except to sell off assets? Most kids want to do what’s right to preserve the family’s assets, but in the absence of any direction from the patriarch, in the absence of adequate cash, they’re often forced to sell the farm to pay the taxes and move on.”
Passing land through generations, with one generation selling to the next for a token $1, can create “all sorts of problems,” Gillentine says. “You should never do this; IRS penalties for 25 or 30 years of back taxes can pile up in a hurry.”
He cited the example of a small farm in a Mid-South state that had been in the family for five generations, being passed with the token $1 transfer.
“It was 60 acres near a metropolitan/tourist area. As the city grew and tourism increased, land values increased enormously. There were subdivisions of $500,000 homes, with new schools and businesses. The farm that had been valued at $1,000 per acre went from being worth $60,000 to being valued at more than $6 million. They were looking at about $1.5 million in taxes. These were just normal people who found themselves with a serious problem, which was compounded by their having passed it down over the years at a cost basis of $1.”