The topic of one’s death is not something anyone likes to think about.
However, it is important to think about what happens after you die, especially if you own and operate a farm or ranch.
Properly planning your estate can ease the burden on your family and mitigate potential tax issues.
Your will is the foundation to this planning. It determines how your assets will be distributed and who will execute your wishes.
Most farmers want their family to get along after their death, gathering together for Christmas and other important events and to have the farm business grow indefinitely into the future.
That desire is easier to fulfill if the assets of the estate are fairly distributed.
Fair distribution can be difficult, especially as the value of land increases, so it is important to involve all family members and beneficiaries in this discussion.
You also want to set up your will and estate in a way that mitigates taxes.
Important considerations when drafting your will include:
There can be significant tax consequences upon death for farms that operate as a sole proprietor or a partnership. For example, the inventory in the business could be deemed to be sold at its fair market value.
This does not allow for the usual planning for farmers on a cash basis and can place a large cash burden for tax on the estate and affect beneficiaries. There may be a benefit to incorporating operations to avoid this issue.
It you meet certain requirements, farmland or shares in a farming corporation can be transferred to your spouse or children at cost to avoid additional estate tax.
However, you should ensure that your will allows your executor to use your lifetime capital gains exemption if it makes sense. Your executor can elect to use this exemption when specific assets are transferred to give your beneficiaries a bump up in “cost base” and reduce their potential future tax.
You might want to distribute the farm’s land to all of your children, whether they farm or not. However, you also might want to ensure that the ones who farm have access to land that the non-farming children receive.
Options to help make this happen include putting in place long-term leases, options to purchase and life interests.
These options give the farming child a chance to buy the land or have time to plan using the current land base.
Determining the executor is a major choice in a will. This person must be able to deal with your family, beneficiaries and professional advisers. Your executor may face difficult decisions and situations, so it may not be an appropriate role for everyone.
You can help alleviate the burden on your executor with the following actions:
- Tell the executor where you keep your will and important documents. Your lawyer will normally store them for no fee.
- Maintain a list of beneficiaries and contact information.
- Keep records of all assets and their location.
- Leave instruction for administration of estates that may be more long term.
- Consider appointing a secondary executor in case the primary executor is unable to fulfill the obligations. You may also stipulate fees or thresholds that will be paid to your executor for administering the estate.
It is important to discuss plans with professional advisers when estate planning.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: firstname.lastname@example.org.