When the first settlers of Christian, Todd, and Trigg Counties arrived in the late 1700s it was agriculture that sustained them. Corn, wheat, and tobacco were prominent at that time and those crops are similarly important today.
Agriculture in Kentucky has changed to meet the demands of Kentuckians over the years. According to the Kentucky Farm Bureau, Kentucky is home to 76,500 farms, having the 6th most number of farms in the nation. While more than half of the land Kentucky is used as farmland, it is small farms that dominate Kentucky agriculture. Billions of dollars are spent and earned in this industry each year.
If you are one of the many farmers in Kentucky, a well formed estate plan is critical. Farms are valuable assets, and like all assets, there needs to be a plan in place as to how this property will be handled at your death. Here's what to know in Kentucky about estate plans if you have a small family farm.
Why Should You Have an Estate Plan for Your Farm in Kentucky?
A Kentucky farm estate plan is very important if you want your farm to pass on to certain persons upon your death. Many times we see farms that have been in the family for generations – sometimes well before the Civil War – either be sold to pay estate taxes or passed on to certain individuals that have no intentions on mainlining the farm. Having a comprehensive farm estate plan allows you to avoid expensive death taxes as well as secure ownership and management of the farm with minimal if any involvement of the courts.
Moreover, it is important to underscore that when you die, you need an estate plan for your farm if you want to keep the land as agricultural land. If you do not have an estate plan in place, then the land could potentially be converted to other uses, sit fallow, or be rezoned as commercial property. For example, look at the many of the older farms in Christian and Todd Counties that have been sold in the past 10 years to make way for new industries and commercial lots.
There is much time, money, and effort sacrificed into farmland, and so you don't want your death to create vulnerabilities that could be the end of the farm.
What are the Goals of a Farm Estate Plan?
While preserving your legacy and that of your ancestors is important, there are several other issues that you need to consider as well. A well-crafted farm estate plan should accomplish three specific goals:
- Smooth and immediate transfer of ownership and management of the farm and related-assets to a new operator;
- Probate avoidance(g., the farm won't become the subject of probate); and
- Tax avoidance (g., income, gift, inheritance, and estate taxes).
To achieve these goals, various strategies can be used. Some examples include:
- annual gifts to transfer the farmland, business, and management responsibilities gradually;
- buy/sell or buyout agreements that protect co-owners and outline terms, conditions, and pricing for when a co-owner retires, dies, divorces, or wants out;
- life insurance policies that can help fund buy/sell agreements and help pay for death taxes;
- trusts and family limited partnerships (FLPs) to manage the operating and business of the farm; and
- agricultural conservation easement to provide permanent protection or farmland;
The Key Takeaway
If you have a farm in Kentucky, you need a comprehensive estate plan to ensure that the farm is preserved after your death. Understand that estate planning for farms can be complex. Tax planning and directing who will control farm assets at your death is essential. You should consult with an estate planning attorney to make sure you have the right strategies and tools in place.