How to protect your farm and save money

Since the Secure Act took effect on January 1, 2020, advisors have been telling farmland owners to take advantage of changes to develop or update their plan to pass the farm on to the next generation.

The legislation, which stands for "Setting Every Community Up for Retirement Enhancement," was part of a government spending bill and enacted a number of numerous provisions, says Margaret Van Houten of the Davis Brown Law Firm in Des Moines, Iowa.

• READ MORE: How to plan a family farm transition

The Secure Act overlaid some old retirement rules with new ones. "It was very complicated," Van Houten says, "but there were a lot of benefits."

An updated Secure Act may be coming soon. The House of Representatives passed the Securing of a Strong Retirement Act of 2022 (H.R. 2954, Secure 2.0) earlier this year. The Senate Finance Committee has approved two acts to create its own version of a Secure update. It includes some of the same provisions as Secure 2.0, but differences between the House and Senate versions will need to be resolved before a vote.

Minimum distribution age increasing

The rules concerning required minimum distributions (RMDs) from the 2020 Secure Act changed the age when the distributions must be taken from tax-deferred retirement accounts from 70½ years of age to 72. Other changes included the beneficiary rules for individual retirement accounts.

According to congress.gov, the Senate's updated version would raise the age to 73, 74, or 75, depending on birth date.

• READ MORE: How will Iowa's new tax law affect retired farmers?

Update your estate plans

Davis Brown lawyer Tom Houser advised families to update their estate plans if they were written before 2013 because the legal rules and regulations affecting estate plans have changed since then. It's a good idea to review plans on a regular basis to take advantage of any legislative changes.

• READ MORE: Retirement plan options for farmers

Some estate plans need to go through the probate process, but Houser says it has pros and cons. While it's useful for resolving disputes within a family, it makes things more complicated if the family owns land in different states that may have conflicting provisions in their probate laws. Fortunately, most families don't have the level of conflict that would require probate.

The estate planning process needs to be streamlined, Houser says, in order to minimize administrative expenses and to ensure that family members who are inheritors are treated equally among different state statutes regarding property in the estate. Creating a revocable trust can help streamline the administrative process and reduce overall costs, he says.

Create LLC

Another way to streamline an estate plan of a farm family is to create a limited liability company (LLC), according to Breanna Young of the Davis Brown firm. An LLC also limits the farm's liability in case an accident occurs on the property by creating an extra layer of protection.

For tax purposes, there are different classes of LLCs, she remarked. A single-member LLC may be considered the same as a sole proprietorship by the Internal Revenue Service. For a multi-member LLC, the IRS may consider that as a partnership, a "C" corporation, or an "S" corporation.

• READ MORE: Focus on the farm succession issues within your control

The LLC separates ownership of the property from the managers of that property, Young added, which enables the parents to maintain their management of the farm while they are still alive.

Because the LLC is legally considered the sole owner of the farm, its value may be higher than if there were multiple owners dividing the farm's value, she says.

In case some of the members of the LLC want to put the farm up for sale, the LLC can grant the right of first refusal to family members in the LLC who don't want to sell, Young says. The value of the farm can be set by mutual agreement between the LLC members or, if they can't agree on a value, it can be based on a neutral, third-party appraisal conducted by a professional appraiser or real estate agent.

Give portion of farm annually

Van Houten says the gift law allows farmland owners to give a certain portion of the farm to each of their succeeding family members annually, thus lowering the monetary tax consequences of the federal estate tax when the parents die.

• READ MORE: Design your farm succession plan first, then gift farmland

In 2021, the gift tax annual exclusion was $15,000 per person, with a lifetime exemption of $11.7 million. According to irs.gov, those limits have been raised for 2022, to $16,000 per year and a lifetime $12.06 million. They should remain the same for 2023.

In this age of very high estate tax exemptions, Van Houten says, it is more important than ever to consider the income tax "basis," or assumed cost of the property at the time of the lifetime gift. Although a gift can end up saving no estate tax, it can cause a capital gains tax when it is sold by the beneficiary, she says.