Payment limitations and estate planning for farmers: avoiding pitfalls

Payment limitations and estate planning for farmers: avoiding pitfalls

How to maximize farm payments while doing estate planning. Warnings and options explored.

As the average age of farmers in the United States ticks ever upwards, it’s no surprise that their interest in estate planning is keeping pace. Tied into estate planning, of course, is the best way to approach federal farm programs without harming the current, or future, bottom line.

That’s where Robert Serio, a Delta-based expert – of Serio & Bishop in Clarendon, Ark. -- on farm program payment limitations, can help.

“Payment limitations run into conflicts with estate planners all the time,” said Serio at the April 17 Mid-South Agricultural and Environmental Law Conference, co-sponsored by Delta Farm Press. “What we spend a couple of months putting together, estate planners can destroy overnight,” said Serio as the audience laughed.

“If you have clients that own farmland, or are tenants on farms, there will some issues involving the farm programs administered by the FSA or NRCS. Those farm programs carry with them limitations.”

  • $125,000 for the new Agricultural risk Coverage (ARC) and Price Loss Coverage (PLC) programs.
  • $50,000 limit, per entity, for Conservation Reserve Program (CRP) payments.
  • $40,000 limit for Conservation Stewardship Program (CSP) payments.

And every now and then there are disaster payments with payment limits, as well. Some years, the disaster payment limits may be $100,000 – “it just depends on the year.”

Avoiding the intricacies of how new farm bill programs work, Serio said “it’s safe to say there are base acres and payment acres and a money calculation that determines how much each particular farm might draw. The new programs, with averages and income projections, (mean the situation) is a bigger mess than it ever has been.”

The limitations are assigned to entities.

“So, what is an ‘entity’? Well, a human being is an entity if they’re 18 years old and haven’t been convicted of a crime – particularly a drug crime – and is a citizen of the United States. Now, there are exceptions for non-citizens. Generally, anyone who meets those requirements is eligible to participate in farm programs as long as they are ‘actively engaged’ in farming or, under the NRCS, ‘conduct a farming operation.’”

Most of those that really need estate planning will be farmers “who are going to probably, through their farmland or operation – at least here in the South – exceed a payment limit.”

An ‘entity’ can also be a corporation, LLC, a trust. “Those are the types of things we normally see. With rather large farming operations, we want to see how many payment limits we can really get to.”

Under the 2008 farm bill, if the husband qualified as ‘actively engaged’ then a spouse could, as well. That provided the ability to get two payment limits if both were involved in farming. That meant instead of a $125,000 limit, it could be $250,000.

“With corporations or LLCs, there’s a way to expand the limits even further. Hypothetically, there’s as many partners in a general partnership as can qualify. So, there’s no limit to the number of payments for a particular farming operation assuming they farm enough land and the funds are available.”

Set-ups and pitfalls

A landowner who cash rents the land isn’t eligible for farm program payments. “So, we don’t talk about lease holders when talking about estate planning.

“Those who crop-share are eligible for program payments. That may be something the estate planner wants to consider.”

Adjusted Gross Income (AGI) is another limitation at $900,000. “The estate planner must consider that since it’s $900,000 for every individual. That means, if you set it up right, a husband and wife can limit out at $1.8 million, not $900,000.

“Again, you must be careful about how the money comes in. For instance, if the husband owns all the land, participates in the farming operation and draws a considerable amount of rent that might throw him most of the $900,000 (AGI).

“Meanwhile, the wife doesn’t make anything close to that. However, the IRS can ask you to prove who makes the most money. It’s a good idea to make sure the husband and wife own the land, equipment, whatever, equally so that when the income comes in it’s balanced out.”

Serio has run into cases “where the farmer has another business that the wife doesn’t participate in. Maybe he owns a John Deere dealership. Well, when he sells the off-farm business, all that income gets dumped onto him and, even though he’s farming, that makes him ineligible to participate in farm program payments. If the ownership of that business had been differently placed, if the wife had owned a percentage, we could spread that income out and still have a (farm program) double limitation.

“That’s the type of situation you must take into account. Don’t build up one spouse’s earnings over the other’s. Be careful to keep in mind that $900,000 payment limitation.”

Maximizing payments

Farmers also want to maximize their eligibility for farm program payments. What can be done to achieve that? “As I’ve said, general partnerships don’t have payment limits, only partners do. So, we generally set up farming operations as general partnerships. The partners, if an entity and are ‘actively engaged’, are then eligible for payments.

“A husband and wife might be in a partnership and go to see an estate planner. The planner may say, ‘You don’t need this partnership. Let me put you in an LLC.’ What has he just done? Collapsed the payment. Instead of two payments, he’s just made it one.”

One thing Serio has learned about farmers: “they’d rather worry about funds coming in today than what their heirs will have when they die. They like the money right now! So, it’s not a good idea for the estate planner to be taking money out of their pockets.  

“Here’s an example that stands out to me. There was an estate planner that advised three sisters who owned a lot of CRP ground. They were drawing $150,000. He created a trust for all three sisters and had some succession planning. Well, what happened? All of the sudden, instead of $150,000, there was only $50,000 in CRP payments. That’s the type of situation we run into and it isn’t uncommon.”

The capital infusion rule

A more unique situation comes in with the “capital infusion rule” and basically applies to farming partnerships. “There’s a rule in ‘actively engaged’ in farming that says you must put in ‘left-hand contribution, capital, land and equipment.’ … To be actively engaged with a left-hand contribution, most of the time the farmer will need capital as his contribution. That’s how he funds his rented land and his equipment. So, that capital infusion is very important to farming operations of some size.

“There’s also a rule that says, basically, a landlord can’t sign, guarantee, or secure the promissory notes of the tenant. What happens if I have an entity of a husband, wife and two or three corporations? Say, each owns 20 percent. The land is in a trust and they go in to see their loan officer. The officer, as they’re wont to do, want to take in every piece of collateral they can get. They see that the trust owns a considerable amount of farmland. The officer wants the trust to guarantee or secure the farm loan.”

Unfortunately, that collapses the capital infusion. “It’s no longer considered to be a significant contribution and likely taints the equipment and land-rent payments. … All of a sudden, we’ve lost the left-hand side of the equation – there’s no contribution of land, capital or equipment.”

Planners can’t provide the best estate planning without some feel for farm program payment limitations, Serio warned. “At least contact an attorney who understands the limitations. You’re just walking through a minefield if you don’t. … Accountants are bad about the same thing.”

The CRP also has payment limitations. “CRP is actually a commodity, really. I have clients that buy and sell CRP ground. They gather them up and we put them into partnerships so they can draw more than the $40,000. We want to make sure we’re maximizing payments. If the payment is there, we want the client to take it in.”

Trusts

The top issue Serio deals with is joint husband/wife trusts. Such set-ups are “basically a survivorship trust. … It’s going to have one Social Security number and generally doesn’t even get a tax ID number.

“Now, if you’re dealing with the FSA, you very well may get a tax ID number because their computers may not tell the difference between a human being and a trust. They want you to bring them a trust number. They can’t designate in their software the difference.”

Normally, only one child ends up on the farm to take over for the parents. “If a farmer has three or four children, he’s lucky if one comes back. It’s rare that two will come back. When it comes time for Dad to do estate planning, he usually wants the family to keep the land and to farm forever. He doesn’t want to see it disappear and wants to allow his child the opportunity to continue farming.”

However, provisions in the estate plan might not set well with his other children. “There are things that might be considered in that situation. How can the farmer be fair and still leave the farm to one child?

“There are a number of ways we’ve approached that. With equipment and land we’ve sometimes offset with life insurance. In a will or trust, though, there needs to be some real correctives on how these matters will be handled so there aren’t a lot of questions from the children. The best thing to do is cut any problems off at the pass by (an early) defining of what will be done.

“You want to have some formula in the will so it lessens the burden on the child that stays on. At the same time, you want a fair amount of the assets going to all. Oftentimes, I’ll also (put in the plan) that if the on-farm child takes advantage of a sweetheart deal and sells the land within a certain number of years, then he has to pay X amount to the other children. That means all the children get to benefit.”

Serio pushes farmers to open a dialogue with their children. “I tell farmers, if you can get them to do it, try to have a family meeting. Try to lay all this out in front of all the children – ‘this is how I feel.’ It’s hard to talk about dying and leaving your property. But as an estate attorney, you need to emphasize that point. The best thing is to let everyone know things ahead of time so they have a chance for input. ‘I’d like to do it this way or that way.’

“Then, you can work through it. It certainly saves squabbling in the end – and those can be serious squabbles that lead to kids never speaking to each other again. I hate to see that when it occurs.”

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