Family Farm Succession Planning Is Job for Impartial Tax Advisers

Family farms are a central tenet of the American experience. They remain relevant today even with technological advances in automation as conglomerates manage more operations. Tax advisers working with family-owners of multigenerational farms can play an essential role by integrating tax strategies with nuances of family dynamics—and by balancing financial growth with legacy preservation.

Let’s consider a hypothetical family to illustrate challenges and strategies of tax-efficient transition planning to preserve the family farm. Bill and Stella raised their four children on an 800-acre farm in North Carolina. The children became the family’s first college graduates, established successful careers in cities, and had children of their own. The grandchildren visit the grandparents on holidays and participate in farm life—helping care for livestock, planting soybeans, and learning when trees are ready to harvest.

Bill and Stella, now in their 60s, stay actively involved in operating the farm. Their children, having invested in intangibles and technology, struggle with their parents’ resistance to innovations that improve farm efficiency, lack of business structure, and rejection of further investment opportunities with indirect management of operations. The parents have basic estate planning from the local attorney (with no tax planning) and have appointed the eldest as the executor.

Family office management of farmland families such as Bill and Stella’s can implement innovative solutions including forming agricultural cooperatives, employing professional farm managers, and leasing land to third parties who can provide the family flexibility in their extent of involvement. The next generation can then adjust their level of involvement at different times as their priorities allow.

Incorporating tax strategies such as structuring the farmland operations as a business allows for additional investments through organizational structuring, data-driven decision-making, formalizing farm management roles, and removing emotional entanglements. Process improvements to ensure tasks are properly assigned by skill levels and resource availability can enhance production of the farmland for generations without relying on every family member’s direct contribution.

Intergenerational communication can break down because of significant differences in the continuing operation and management of precious family assets, which result from each generation’s unique circumstances. Adding unrelated, dispassionate professionals to the management structure can preserve family relationships and values while allowing for continued wealth preservation and growth.

For instance, having one or some of the children manage the farm can create personal resentment. Incorporating a corporate executor and trustee into the planning for Bill and Stella instead of making the eldest child the fiduciary would mitigate any perception of favoritism in distributing and managing the beneficiaries’ rights.

Farmlands also enjoy certain qualified property tax benefits that can be maximized through proper structuring. Conservation easements, for example, allow preservation of land for generations without the additional work of maintaining the designated portion of land for active farmland operations. The easements provide the benefit of charitable deductions while keeping ownership in the family.

Tax-beneficial shifting of income and expenses, with access to commercial lending and leveraged investment opportunities, can further enhance family activities related to farmland operation and the younger generation’s participation. A business-focused strategy also integrates transfer of wealth to the next generation through strategically planning gifting of interests and allowing for transfer of the ownership without the transfer of full control and management until each generation transitions into a less active role.

Continuing the farmland operation as an active farm also provides extensive tax benefits for income tax, such as reinvesting into renewable energy for tax credits and estate taxes, such as computing tax on a significantly lower value as qualified real property. Bill and Stella’s grandchildren’s active involvement in the farm can be structured to provide allocation of income or non-controlling interests aligned with overall tax efficiency.

Uncertainty about future generations’ career paths, spousal relationships, and personal and financial commitments often delays succession planning that would shift control or ownership to the next generation in a tax-efficient manner.

Delegating professionals to manage family communication and mitigate potential discord is critical to building trust and transparency needed for succession planning. Organizational structures won’t be sound if older and younger generations don’t communicate effectively. Professional family office management can ensure that the younger generations’ views are heard and considered, and that the previous generation has a better grasp on the younger generations’ relationships and careers.

Integrating management, intra-family communication, operations, tax-efficient business and estate planning, and financial management in a family office is ideal for affluent farmland estate owners such as Bill and Stella. The professionals can advise and manage the family’s assets and their relationships with a proper succession plan. This facilitates growth and preservation of the farmland for future generations, who can pursue their own paths while maintaining a stake in the family’s agricultural legacy.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Priya Prakash Royal is managing attorney of Royal Law Firm, an international private client tax law firm representing multinationals and business owners with US and cross-border wealth preservation and asset protection.

Jeremy D. Royal is chief strategy officer of Klexa Consulting, with over 25 years of experience in providing comprehensive management and operations solutions for family offices and business owners.

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