Making a Drought Work for You
Business, Tax, and Estate Planning Moves You Must Make!
No one truly benefits from a drought. However, drought years are important reminders that there are business, tax, and estate planning opportunities that farmers, ranchers, and vineyard owners may have ignored during good years.
Most farms, ranches, and vineyards will benefit from a business plan that separates land ownership from farming operations. If the land is held in one entity and the operational entity is kept separate, income can be funneled to the land company. If drought conditions persist, bankruptcy protection can be sought for the operations company, but will not affect ownership of the land.
Tax planning during drought years is essential. Most farms, ranches, and vineyards account for crops on a “last in, first out” basis (“LIFO”). During good years, rising prices for goods and equipment purchased will reduce taxable income and a “bank” of untaxed harvest is created. During drought years there is not enough harvest or expenses against the current harvest, and previously untaxed harvests will be subject to higher taxes. Careful income tax planning is more necessary than ever!
If a family farm, ranch, or vineyard operation is worth more than $5,000,000.00, planning must be done to reduce or to eliminate needless estate taxes. Creating a business structure – typically a limited liability company or a limited partnership – allows gifting to family members which will reduce the value of the farm, ranch, or vineyard for estate tax purposes. The reductions in value are increased during drought years because the initial values will be reduced, and the reductions in taxable values will be greater than in “bumper crop” years.
Almost every farm, ranch, or vineyard will benefit from this planning, even if it is worth less than $5,000,000.00. The limit on transferring low property tax rates to future generations is only $1,000,000.00 for investment (farming) property. However, a limited partnership or limited liability company can be used to divide the farm, ranch, or vineyard for real property tax purposes. Given enough time, the technique can be used to completely eliminate increased property taxes on every transfer to children or grandchildren. As with estate tax planning, property tax planning benefits from reductions in value during drought years.
Every farmer, rancher, and vineyard owner should consider this type of planning during drought years. Drought years certainly serve as a reminder to review what has been done in the past. Acuña ❖, Regli can help you and your tax professional with some of the most important business, tax, and estate planning that you can do. Your family’s farming future may depend on it.
Acuña ❖ Regli provides expert services within the four corners of family wealth transfers: Estate Planning, Probate and Trust Administration; Conservatorship and Special Needs Planning; and, Inheritance Litigation. We are also available to counsel our clients and to refer them to competent, qualified attorneys who can help if they need further, specialized help. ContactUs@AcunaRegli.com or call (925) 906-1880.