This guest post is courtesy of Kyle Randolph, Regent Law 2L and current Wills, Trusts, & Estates student:
As we go through this holiday
season enjoying delicious meals and treats, we must remember where much of this
fattening food comes from family-owned farms. According to data from the United States Department of Agriculture (USDA),
roughly 97 percent of America's farms are smaller family farms.[1]
And even more surprisingly, those family farms are dying. Further data shows
that only 30 percent survive into the second generation, and only 12 percent
are still operating by the third.[2]
There are many reasons for this, but at least in my home state of Michigan, one
of the biggest reasons for the collapse of the family farm are estate planning
issues, specifically property taxes.
Assessment of
property taxes in Michigan, traditionally, was based solely on the current
cash value of the property.[3]
This assessment process changed in 1994 with an amendment to the Michigan
Constitution. The amendment provided a new system for assessment, which, in
most circumstances, limited the year-to-year increase of property tax to the
annual inflation rate (or 5% if inflation is higher). However, the assessed
value will be uncapped and jump back to the actual property value if the
"ownership of the parcel of property is transferred."[4]
Now there are
dozens of exceptions, such as transfers between spouses or transfers via a
retained life estate such as a Lady Bird Deed (discussed here at Family Restoration). Still, unfortunately, for
Michigan farmers, who often keep family farms inside Limited Liability Companies (LLCs), the legislature has
provided that a change in ownership over 50% of an LLC, such as when the owner
dies, all the property held by the LLC will be uncapped. For these centennial
farms, this can cause the property taxes to jump to a drastically high amount
and force the second generation to sell the farm to avoid paying the newly
assessed taxes.
Therefore,
while transfers between spouses and direct relations do not uncap properties,
since the grantor, in cases of LLC ownership, is a non-individual legal entity,
these exemptions cannot apply. Similarly, since LLCs involve a commercial
business, there is a further complication to many traditional estate planning
devices such as the Lady Bird Deed. Likewise, when the property is in an LLC,
the farmer cannot just transfer an ownership interest in the LLC to the
children because this would trigger an uncapping of all the property taxes for
all the properties the LLC owns.
Now it is possible to transfer
agricultural property out of the LLC through the agricultural exemption and then
transfer that property either into a trust or through a Lady Bird Deed to the
devisees without uncapping as long as the property remains agricultural and the
children file the correct affidavit attesting to that. However, in terms of
doing that, for all the property, the farmer would lose the liability
protection that the LLC affords for their family business.
While there are
no easy solutions to the little discussed issue of uncapping property taxes in
intergenerational farm transfers, one thing that anyone can and should do is
discuss one's estate plan with a trusted attorney. According to the referenced
data from the USDA, over 75 percent of those small family farmers do not have
an estate plan.[5]
While even the most nuanced estate plan might not solve the property tax issue,
it can prevent many other potential problems and help keep farms in the family
and holiday foods on our tables.
[1] Christine Whitt, A Look at America's Family Farms, USDA.com, (Jul. 29, 2021), https://www.usda.gov/media/blog/2020/01/23/look-americas-family-farms
[2] Ryan F. Baker, Farm
Estate Planning -- What You Need to Know, OPEN ADVISORS (Jan. 14, 2020), https://www.myopenadvisors.com/farm-estate-planning.
[3] See MICH. CONST. art. IX,
§ 3 (amended 1994).
[4] See id.
[5] See Sarah
Patterson, Saving The Little Guy: Estate And Inheritance Taxation On Generational
Farmers And Ranchers, 13 Tex. Tech Est. Plan. Com. Prop. L. J. 1, 2 (2021).
No comments:
Post a Comment