How to Transfer Your Family Farm
One Sibling Operating Farm, One Sibling Owner in Interest Under LLC
- 1). Establish either an LLC or trust to administer the estate, whichever is most suitable for tax avoidance and equitable distribution of the land, home and machinery's value among your offspring. How the property or its equivalent value will be shared must be specified in great detail under an LLC or trust. In a trust, a trustee must be named to carry out the terms of the trust after your death.
- 2). Depreciate all machinery as early as tax law permits, usually 3 years to 5 years, depending on the equipment. Gift the depreciated equipment to the trust or the LLC. You can gift equipment up to $13,000 per year per sibling to a lifetime maximum of $1 million. It can be used as equity to purchase new equipment for use on the farmed land and subsequently depreciated. Transfer livestock by leasing the animals to the child operating the farm and accept lease payments and proceeds as cows and bulls are culled from the herd -- the offspring will belong to the child. Eventually, the cow herd (or other farm animals) will be moved from the parent to the next generation without it counting against gift limits.
- 3). Gift the home on the property to the trust or sibling residing on the property if the home has a fair market value of less than $1 million. Leave the home in your will to the farming child or trust tax-free if it is worth more than $1 million but less that $3.5 million.
- 4). Set up a Grantor Retained Income Trust (GRIT) as an alternative to step 3 (optional). This trust allows you to gift your home to your children immediately without your children paying taxes on the home. You may continue to live in the home for 10 years after placing it in a GRIT, under IRS regulations.
All Offspring Operate the Farm Under LLC
- 1). Place the farm in an LLC or trust, specifying in great detail all likely eventualities, including offspring pre-deceasing one another and how the remainder of the assets are to be distributed. Essentially, this will be similar to the steps above but with different considerations which may lead to different options in the way you structure the transfer.
- 2). Proceed as you would with the above steps except after depreciating your equipment, offer it as a gift to all the offspring -- either directly or through the trust or the LLC, whichever makes the most financial sense and presents the most tax savings under the methods you've selected.
- 3). Gift the homestead to the corporate entity that has been established. The details of how and who lives in it should be considered as part of the equitable distribution of the farm and addressed by mutual consent among parents and offspring and should be detailed in the terms of incorporation or trust as it is formed. Gifting the homestead becomes more challenging because of the unlikelihood that all family members will want to live under one roof in perpetuity.
- 4). Establish a GRIT, which is optional to address the living circumstances of the parents.