Consider Other Business Structures to Aid in Estate Planning
PINE BLUFF, Ark. – Choosing the right business structure for a farm or ranch can help ensure that a farming heritage is a legacy for many generations to enjoy, says Dr. David Fernandez, University of Arkansas at Pine Bluff Cooperative Extension Program livestock specialist.
Even though many small farmers and ranchers want to leave their farms to their families, they do not have a plan. And, without your plan, the state of Arkansas has a plan. Some 86 percent of Arkansas farmers are sole proprietorships; the “company” dies with them, says Dr. Fernandez, a small part-time rancher, too. Without a plan, the courts decide how an estate should be divided. In the meantime, heirs can receive up to $1,000 from the estate to pay bills or buy food.
Partnerships face a similar problem. When a partner dies, the partnership is dissolved. The farm business cannot continue until the deceased partner’s estate is settled. The living partner(s) may have to negotiate a purchase of the business from the heirs who may have unrealistic expectations as to the value of the business. Sometimes, inexperienced heirs want to make important business decisions that can be a problem for the business.
Instead, partnerships should consider purchasing a life insurance policy on each partner as part of a “buy-sell” agreement, says Dr. Fernandez. The partners place a value on the business and purchase a life insurance policy that pays the price to the heirs and grants the full business interest to the surviving partners.
Or, farmers may set up a corporate farm structure to allow farm families to pass along their farming heritage by dividing shares of the business among heirs. “Farm corporations can be limited liability corporations (LLC), S corporations or C corporations,” says Dr. Fernandez.
The farm business does not end with the death of any of the shareholders. Business decisions are made by the “board of directors” who are usually the rest of the family. Family members receive “dividend income” from the farm based on the number of shares they own and the farm’s income. If only one or a few family members are actively engaged in operating the farm, the farm business typically pays them a salary in addition to dividends from their shares.
Creating a will or engaging in estate planning is often stressful. Professional estate planners and attorneys can help create a plan that is fair and equitable to all the heirs. Taking the time to plan for the future now will ensure your farming heritage.
Information in this article should not be considered an authoritative basis for interpreting the laws of the state of Arkansas on matters of ownership or estate planning. It is intended to help a person better understand property ownership and be prepared to use the professional services of an attorney.
Dr. Fernandez is interested in helping small farmers and ranchers manage their small farms and ranches efficiently and profitably so they can continue their farming legacies. For help with livestock care, production or management, contact Dr. Fernandez at (870) 575-7214 or firstname.lastname@example.org.
January 31, 2014
By Carol Sanders
UAPB School of Agriculture
Fisheries and Human Sciences