Farmers face some unique challenges when planning for the future. Kentucky residents are often stunned to find out that their family farm can trigger federal estate taxes and a significant bill from the IRS. The Kentucky inheritance tax can also be a significant financial obstacle for farms owned or inherited by extended family members.
Like any family business, you want to keep your Kentucky farm in the family and profitable for generations to come. To do that, you will need the help of an experienced estate planning attorney. This attorney can help sort through the inheritance complications and tax issues that inevitably arise.
Keeping it in the Family
Family farms are unique because your family likely has an emotional attachment to the land and the work that made it what it is. If keeping your farm in the family is a priority, trusts and limited liability companies may be useful tools to pass the farm on to family members but still treat those relatives who don't want to farm fairly.
You can transfer the farm to a trust during your lifetime or death rather than transferring it directly to your heirs. You can control the land's use and disposition, including renting it to one child who wants to farm or renting to a third party. Your heirs can then receive distributions of rent income through the trust. A trust can also prevent your heirs from selling the land for a period of time, direct that the land only be used for agricultural purposes, or if the trustee elects to sell the land, direct that it first be offered to your heirs on favorable terms.
Limited Liability Company
Another option is to transfer the farm to a limited liability company (LLC) or other corporate structure, to be owned by one or more heirs. The operating agreement can restrict transfers of interests to third parties, create a management structure, and include voting and non-voting shares.
Update Beneficiaries and Titles
As part of your estate planning, you need to ensure that you keep the beneficiaries on any insurance and investment plans that you have up to date. Proceeds from life insurance and retirement accounts should have direct beneficiary and contingent beneficiaries to avoid probate. When you die, the proceeds will pass directly to your named beneficiaries without getting caught up in the rest of your estate. But if you don't regularly update your beneficiaries on these accounts, you could unintentionally end up disinheriting a new addition to the family.
The same applies to some bank and investment accounts, or even property that you own jointly with a right of survivorship. For example, if you and your brother buy a farm in Kentucky jointly with a right of survivorship, and one of you dies, the other will automatically take ownership of the property. Once you both have families, however, you may both prefer that your heirs inherit your share of the farm. So, it's a good idea to regularly look at your assets, accounts, and property and think about the right of survivorship and who you would like to inherit your estate.
Protect Assets from Unintended Beneficiaries
A trust or LLC can also help prevent your assets from inadvertently passing to unintended beneficiaries. If one of your heirs goes through a divorce or faces creditors, you don't want a court to order the sale of farmland or assets as part of a divorce or bankruptcy. If the farm passes directly to your heirs without protections, your property and assets could unintentionally pass to third parties.
Avoid Unnecessary Taxes
While the $11.58 million threshold for federal estate taxes seems high, the value of farmland, equipment, and other assets can easily approach this death tax exemption. Moreover, some states, including Kentucky, have an inheritance tax on top of the federal estate tax. The inheritance tax is a tax on the beneficiary of property from an estate. In Kentucky, both the relationship between the deceased and the beneficiary and the property's value determine the tax rate. The tax applies to all personal property owned in Kentucky, including farmland, farm equipment, and livestock.
Close relatives, such as spouses, children, parents, grandchildren, and siblings, are entirely exempt from the Kentucky inheritance tax. But more distant relatives such as cousins, nieces, nephews, and aunts and uncles are subject to the tax. In some cases, there are small exemptions for more distant relatives. By creating a trust or a corporate entity, you can avoid significant estate and inheritance taxes when dealing with farms. With a little planning, you can ensure a legacy for your family farm and ease the complication and expense of probate and property transfers.