February 4, 2016
AG CASE STUDY: Succession & Business Planning
"The facts vary such that no two situations are ever the same." - Jeff Bowman, CPA, Partner and Ag Team Lead
A first-generation farmer in Stanislaus County wanted to pass on his individually owned business to his adult children. The second generation planned to maintain and enlarge the operation, which included farming and ag processing. Important to note, not all of the farmer's children were employed on the ranch.
The farmer wanted to ensure the children inherited equitably.
All parties wanted to limit the liability exposure posed to the farmer as an individual owner and operator.
The father and his children wanted to limit taxable income and estate taxexposure for the older generation.
The operation needed to be positioned for future growth.
CONSIDERATIONS & TACTICS:
Limiting tax impact on contributing operations to new S Corp and Limited Partnerships
Considering the benefits and burdens of an IC-DISC entity
Determining how and through which entity owners should be compensated
Cash-basis methods available for farm activities
Important factors for tax planning:
Farm income averaging and qualifying types of income
Net investment income tax
Active versus passive investor treatment
Maximizing the domestic production activity deduction
Optimizing income for IC-DISC commission purpose
FINAL RECOMMENDATION & FINAL OUTCOME:
Along with the farmer's attorney, we recommended forming a new operating entity and a separate entity for holding the real estate, reducing risk and providing flexibility. The new operating entity is used to maintain the business services, equipment ownership, and labor for the farming operation. By forming the realty entity, the father was able to conveniently introduce ownership to the second generation. In the end, our Ag team developed a fair, strong succession plan for our client by working with his attorney and taking into account the current and future needs of the operation.
Forming entities and limiting liability exposure require a high level of legal counsel. We worked closely with the client's attorney while analyzing succession options. The attorney's estate tax expertise ensured the plans were consistent with future gifting and estate transfer intentions, while mitigating risk.
*FYI: The attorney filed state articles of formation, obtained a federal ID number for each entity, drafted the crop share lease and farm management services agreement, formed the IC-DISC, and drafted the commission agreement. The attorney also created a deed for transferring the land.
Cynthia is a Tax Manager at Grimbleby Coleman, where she utilizes her skills to help clients meet their present needs and future goals. “Knowing that we can bring clients a peace of mind, even if in just one aspect of their lives, is what makes our work worthwhile.”
In the past, Cynthia has served on the Board of Directors for the CalCPA San Joaquin Chapter and has participated in the Relay for Life.