Young and Entry-Level Farmers Would Benefit From Less Farm Retirement Auctions

 

 

         I have read farm magazines for the vast majority of my life and still do.  Although I do most reading via the internet, there’s something about reading a printed farm magazine that I just can’t get out of my system.  Prior to the last five years or so, I don’t recall seeing a lot of “farm retirement” auction advertisements.  Sure, they were there, but they seem to have picked up during the last downturn in the farm economy.   I figured it was a lot of farmers who did not care to weather another economic downturn.  Seeing that we’ve now had 2-3 years of better years, and the retirement auctions have not subsided, perhaps even increased, I’m not so sure my thinking was correct.  Actually, using the word “retirement” and “farmer” in the same sentence was rare in years past.

             What I have noticed is the difference between clients that were raised through the depression versus baby boomers.  Earlier in my career, when I had more farm clients that had lived through the depression, they seemed to be perfectly happy with the thought of dying out on the tractor.  With less clients still alive that lived through the depression, and more baby boomer farm clients past 70, these baby boomer clients seem to have more an interest of retirement, moving to Florida or being a snowbird, and are fine with calling it quits along the same age range that the general population retires.  These folks seem to look forward to a life after farming.  I don’t want to paint with a broad brush, but having done this job for 17 years, all I can say is I have more farm clients that want to retire and spend some time in a warm place than I ever thought I would have.

             According to the USDA, five hundred thousand farmers will retire this decade.  Supposedly, three hundred eighty thousand of these farmers have someone to take over the farm.  I’m not as optimistic as the USDA that 76% of retiring farmers have a next generation farmer, but who am I to argue with the USDA.   Either way, the amount of farmers retiring this decade will surely be something we have never seen before.

             We all know the process for a farmer retiring.  The last crop year is completed, machinery is generally sold over the winter months via a “retirement auction”, the land gets rented out and maybe even some sold, and if not sold, then later on passed to non-farming children where a sale of the land likely is more probable than not.  Now, I am not averse to people retiring.   However, a person retiring from a factory job means the person no longer goes into the factory.  The factory replaces the person with a new hire.  A farmer retiring has a much greater impact across a large spectrum of people and industries.

             First, every farm has a story.  Some farms were homesteaded.  Some started only one or two generations ago.  I feel when a farmer retires and their farm operation ceases, a small part of rural America dies. So goes one more customer for the implement dealer, local bank, feed mill, the list is endless.  Think of how many businesses a farmer deals with in any given year.  All these businesses just lost a customer.

             Let’s look at the other end of the spectrum and examine young farmers.  Sadly, if a person is not born into a farm operation, marries into a farm operation, or wins the lottery, the entry price into farming is basically insurmountable.  I applaud the USDA and the various programs they have to assist young farmers and under served farmers to break into farming, but with the current price of land and machinery, the programs just are not enough.  There are more people who would like to break into farming than people realize. 

             Instead of focusing on low interest loans, what if the USDA and the government also focused on incentives for retiring farmers to pass on their operation?  My tax professor in law school said that taxes were often the way the government steers people to certain outcomes that it wants to achieve.  If there is a goal by the government is to maintain viable and sustainable farm operations (I sure hope there is such a goal), a lot could be done to incentivize a retiring farmer to pass on the operation to someone wanting to break into farming. 

             I know of no group or business that helps match outgoing farmers with incoming farmers.  If anyone reading this article knows of such, please let me know.  Who knows, maybe I don’t get out enough.  However, we have online dating sites geared towards farmers to find a match.  Why don’t we have online sites geared towards matching retiring farmers with new farmers?  It seems to me that with the right tax incentives and programs, a lot of farmers would like to see their farm continue, even though the person continuing it may not be a blood relative.  

             When a farmer retires and sells, the tax bloodbath generally begins.   First, if the farmer farms a final year, carries grain over into the next year, has the income from the grain in the new year, but not much in the way of expenses to offset the grain sales.  I’ve had several clients trapped in this situation and have tax bills in the hundreds of thousands of dollars.  In this instance, the government could allow a forbearance on the taxes if the farm operation is passed to a qualifying entry farmer and if such person actively farms for, say 5 years, then no tax is generated by the grain sales.

             Sale of machinery can be especially nasty from a tax standpoint due to depreciation recapture.  When machinery is sold that has been depreciated, the government does not allow a double dip of income off of the equipment and have had the tax reduction via depreciation on the machinery.  When the machinery is sold, depreciation recapture occurs.   In this instance, the government could eliminate depreciation recapture if the farm machinery is sold to a qualifying entry farmer.  Part of the deal could be that the farmer has to sell the machinery for a below fair market value amount.  This creates a win-win where the farmer saves a ton of money on taxes and the entry level farmer gets machinery at a lower than fair market value price.

             Land will be a tougher nut to crack just because of the appreciation in prices that we have seen.  But again, favorable tax treatment could make for a win-win situation.  When land is sold, especially if there is a low cost basis in the land, the amount of capital gains can just be brutal.  On top of that, if the farmer keeps the land, estate taxes can come into play at the death of the farmer.  Section 2032(A) of the IRS code allows for a reduction in value for estate tax purposes if a qualifying family member farms the land for a period of time after the farmer’s death.  Well, why not amend 2032(A) to apply to non-family members?  For sales, a win-win would be if capital gains taxes were waived if the land was sold to a qualifying entry farmer at a reduced fair market value price.  Couple this with some of the USDA low interest loans, and now we have a scenario where I think entry level farmers stand a fighting chance at being able to cash flow land purchases.

             In talking to a lot of farm clients over the years, it is not so much imperative that someone take over the farm that is a blood relative.  A lot of clients see the value in the continuation of their farm whether the farm lives on through a blood relative or stranger.  Personally, if none of my three boys want to farm, I am perfectly fine working with a young farmer that does want to farm, and throw some tax incentives my way, I’m all in.  

             I would love to see a movement begin that reduces farm retirement auctions and replaces such with farm transition arrangements that allow more young farmers to break into farming or expand operations.   For those of you that belong to Farm Bureau, National Farmers Union, Farm Aid, and other farm advocacy groups, I believe this issue needs to be at the forefront.  Sad will be the day when the number of farms in this country stands at only a fraction of the current 2 million farms.  I really thinks the right groups embracing the ideas discussed herein, a change in tax policy, and shift in farmer mindset, could have a seismic impact.  Feed back on this article would be appreciated and perhaps could start some change in this area.

             In closing, even if nothing does change by way of tax incentives and such, for those farmers who do not have a next generation, I would encourage them to work with professionals to generate plans that would facilitate the transfer of their farm to a non-family member who desires to farm.  There are still things that can be done to minimize the taxes involved in the transfer, it just takes the retiring farmer and the new farmer working together.  Non-farm businesses get carried on all the time by non-family businesses.  It is time farming operations are treated the same way.

 

John J. Schwarz, II, is a lifelong farmer and has been an agricultural law attorney for 17 years and is passionate in helping farm families establish succession plans.  Natalie J. Boocher is a farm elder law and Medicaid planning attorney helping farmers protect their farms from the nursing homes and Medicaid.

 

Both can be reached at 574-643-9999 and www.thefarmlawyer.com.

Go to www.farmlegacy.blogspot.com for past articles.

 

 These articles are for general informational purposes only and do not constitute an attorney-client relationship for specific legal advice.