Agricultural Law – Family Farming, Why Incorporate?

Many farmers, even today, own family farms in their individual names. There can be substantial benefits to placing the family farm into a corporate structure. A few of these benefits are discussed below.

Tax Reduction Strategies. Indiana has repealed its Inheritance Tax which is great for the family farmer. However, the Federal estate tax remains on the books. While the exemption from Federal estate tax has consistently increased over the years, the Democrats have proposed bringing the exemption back down. Being incorporated allows the family farmer to transfer of shares (wealth) to future generations without necessarily giving up control. Additionally, the value of the shares is often discounted due to their lack of control and marketability allowing more shares to be transferred without gift tax consequences. Finally, once transferred the shares will appreciate in value in another generation’s hands. Thus, not adding to a farmer’s potential estate tax burden.

Control. An incorporated farm can be established in a way that only those the family farmer wants involved in the business to be in the business. Say Farmer Smith gives his daughter a 60 acre tract. When she marries or dies (assuming without a prenuptial agreement) her husband would have certain rights to those 60 acres. Through a family shareholder agreement, any person that the family does not want to do business with can be bought out of their interest, thus preserving the family control of the family farm operations. So, if the daughter dies and her husband inherits her shares, he could be made to sell those shares back to the corporation or other owners.

Liability. Corporations were created to protect a person’s property from potential liabilities. Say Farmer Smith was driving down the road and caused an accident that unfortunately led to horrific and permanent injuries. The injured party could sue the unincorporated farmer for damages and receive a judgment. If the Farmer did not have sufficient insurance from which to pay the judgment, he could be forced to sell one of his tracts of land to satisfy the judgment. If Farmer Smith had incorporated, and made transfers to his children so that the farm was 40% in his name, 40% in his wife’s name and 20% in his five children’s name, then his interest in the farm is unattractive to the injured party as there are no guarantees that Farmer Smith will receive any payments from the corporation. All income of the farm can be paid out to other family members, so that his 40% interest has no economic value. We have essentially turned him into the turnip that will never give blood.

A corporation is a valuable tool for the family farmer. If you not do so already, you should consider making the change. Contact one of the Ag Law attorneys at Campbell Kyle Proffitt to discuss how incorporating your farm could afford you and your family better protection.

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