June 01, 2018
We have experienced an array of changes in the past few years – changes in the farm economy and the federal tax rules, just to name a few. With these changing times, how is your farm transition, business and estate plan? Does it continue to meet your goals?
Here are a few things to think about:
The importance of “running your estate plan through your balance sheet”
It is crucial to confirm that your estate plan continues to work as you intended it, especially when the focus is on transitioning farm assets in a fair and equitable manner. What worked then may not work now because of changing times.
For example, an estate plan done five years ago giving the farming child the option to buy land from his siblings at 75 percent of fair market value may have cashed flowed then, but how about now with low crop prices?
New tax rules for machinery and equipment trades
As of January 1, 2018, and going forward, all trades of equipment will need to be treated as a sale. The trade-in allowance will be treated as the sale price of the traded-in equipment. The new asset that is purchased will be on your depreciation schedule at the full purchase price.
The senior generation transitioning ownership of equipment to the junior generation is affected by this. For example, consider the common scenario where the senior generation gifts equipment to the junior generation and the junior generation then trades the gifted equipment for new equipment. The difference now is that the junior generation will now recognize the trade-in allowance on the traded equipment as a sale on their tax return and the new asset purchased will be on junior generation’s depreciation schedule at the full purchase price. Prior to this change, the sale of the traded-in asset was not recognized and it would continue to be included on the depreciation schedule with the new asset purchased.
Cash flow is king in farm transitions
Farm transition planning in good years generally provides ample opportunities: the junior generation has a much easier time cash flowing while taking on more of the farm from senior generation.
In difficult times the cash flow abilities are much leaner. Opportunities to transition operations become less. Does your farm transition plan account for this?
Changing times require action on your part to assure that your plan continues to work as you intend it to. We are here to help. Talk to a consultant in the Succession and Retirement Planning Department or your Loan Officer for more information.