1. Minimize estate tax liability One good reason to incorporate is to minimize potential estate tax liability. Nearly everyone has heard by now that the current exemption allows up to $5.12 million dollars to be gifted by a person ($10.24 million for a married couple) without becoming subject to the federal estate tax (states impose their own taxes). This exemption is set to expire on December 31, 2012, at which time the exemption will return to $1 million. With current farmland values at all time highs, $1 million dollars isn't much. Placing farm assets into a corporation and then gifting shares of stock can be one component of an estate plan used to minimize future estate tax liability.
If Congress and the President can reach a deal to avoid the fiscal cliff, the estate tax may not recede to $1 million but instead something in between. The President has previously proposed an estate tax exemption of $3.5 million (or $7 million per couple). Regardless of what Washington does in the next two months, conveying farm assets into a corporation is still a smart thing to do.
2. Reduce personal liability for negligence. Let's say you let a hunter use a farm field each year. This year that hunter accidentally shoots another hunter on your land. You will get sued (the landowner nearly always gets sued when there is an accident on their property). And you could be personally liable if the land is held in your personal name. Equally troublesome, a successful plaintiff could ask the court to sell your field to pay his damages. But if the land where the hunter is given permission to hunt is owned by a corporation, only the corporation faces liability. Your house, car, and other personal savings will likely be outside the reach of the injured plaintiff.
Hunting is just one example. There are dozens of ways that farm ownership can lead to tort liability. Placing farm assets into a corporation is a good way to minimize the risk to you personally.
3. Unify control of all farm assets. In a corporation, decisions are made by a central board of directors. A farmer that leases ground from multiple family members must deal with multiple landlords and multiple lease arrangements. If the same family members convey all their land to a corporation and then issues shares of stock commensurate with the value of the land each contributed, the farmer need only answer to one group--the board of directors. This simplifies how decisions are made and leads to a feeling of fairness among shareholders.
Likewise, when one family member decides he or she wants out of the family business, the corporation can buy back his or her shares and resell them to another family member. The transition is orderly and allows farms to keep all assets in the family, if that is what they want. Corporate bylaws can be tailored to suit each family's unique situation.
A corporation is a valuable planning tool for farms. If your farm is not a corporation, regardless of size, you should consider making the change.
*Disclaimer - Nothing in this post is intended to be used for the purpose of avoiding any tax owed to the IRS or penalties resulting therefrom. You should consult a tax adviser when making decisions regarding payment of federal or state taxes.
By Todd Janzen