Sit around any coffee pot that gathers farmers and you’ll quickly learn three different ways to raise a crop, four differing marketing philosophies and the proper way to maintain a 1978 Chevrolet pickup truck.
But it’s rare that the conversation turns to managing land. That’s just something not talked about in proper circles.
And yet, farm real estate is typically four-fifths of the total value of a farm’s assets, according to the U.S. Department of Agriculture’s Economic Research Service. In 2017, farm real estate, which includes structures and land, was valued at $2.47 trillion. That’s more than 80% of the total value of United States farm sector assets, according to USDA-ERS.
That’s a fairly large chunk of the farm’s financial health, wrapped up in land and structures. A chunk that big should probably have some attention paid to how it is managed in production, passed on to another generation, or leased for other uses than agriculture.
And yet, few will talk about it in polite company.
Tiffany Dowell Lashmet wants to change that and she’s doing so through her work as an agricultural law specialist for the Texas A&M AgriLife Extension Service. She recently spoke about the legal issues that directly affect landowners and farmers at High Plains Journal’s Cattle U, Aug. 1, in Dodge City, Kansas. Conversations about land with family members are the single most critical thing that landowners can do to plan for the future.
And, with the average age of the American farmer at 58 years, it’s a conversation that must be had soon.
Put it in writing
USDA-ERS reported that about 40% of U.S. farmland has been rented over the last 25 years, and non-operator landlords owned 31% of land in farms in 2014. For the average tenant farmer, rented ground can be up to 80% of the land they farm.
Considering that less than 2% of the U.S. population is directly involved in farming operations on the land, and that many Americans are four generations removed from farm country, this should be cause for some operators and landowners to have a long talk about the future.
And yet, it’s a story that Lashmet has heard time and time again, and something she covers in her speeches. A handshake deal between two parties for decades over land leased for grazing, or an easement to cross a pasture to get to another parcel of land is contested by the new landowner after one of the parties dies.
“I think the most important step is that any type of agreement needs to be in writing,” she said. “What we’ll see is that as the age of the average rural land owner keeps increasing, what’s going to happen is those people we have the handshake deals with are going to be gone. The land is going to be inherited by the kids who live in town, or new owners who come from town. They aren’t going to have the relationships we have. They don’t have the historical knowledge of what’s always gone on on that property. They don’t understand agriculture and what’s common.” The best way to protect one’s self is to make sure that any type of agreement is put into writing, signed by both parties, and filed in the deed records in the county courthouse, she added.
“We don’t have to look at a lease in writing as a sign of not trusting the other person,” Lashmet emphasized. “You need to think about it as being something that protects the relationship. It’s not a lack of trust to sit down together and agree to the terms of a lease. It’s protecting the relationship to make sure we don’t have something that goes south that we didn’t talk about ahead of time.”
Ask the next generation
Assuming that family wants to continue your farming or ranching operation, as you’ve set it up, without consulting that next generation is another pitfall that landowners need to avoid. Lashmet explained that often it’s just assumed that the next generation wants to keep agricultural land and real estate in the family, but maybe that’s not always the case.
“Talk to that next generation,” she said. “And figure out what are their interests, their abilities.” If it’s truly important to you to keep the land and real estate in the family, then, have the tough conversations about what that next generation’s plans are and take the steps to figure out what type of estate planning tool or business structure is appropriate to ensure that success, she added.
“There’s no silver bullet,” Lashmet said. “Not everyone needs a trust. Not everyone needs an LLC. It depends on the type of operation. But the one thing everyone needs to do is have that conversation and then work with your lawyer, accountant and financial advisor to have a plan in place.”
What you find out in those conversations may not be what you expected, but it will save a lot of heartache in the end if you find out that you have an heir who plans to sell the land, or if there’s an heir who you didn’t consider wanting to return to the farm but who’s had that plan in their mind for sometime and just assumed the land would come to them.
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“That will change how you structure your estate plan, to avoid things like capital gains taxes,” Lashmet said. “How you transfer property, either through a will or before death can have a huge impact on the capital gains taxes owed.”
When town comes calling
USDA-ERS states that agricultural production accounts for roughly 52% of the U.S. land base. Any changes in that land usage, for example, putting that land into development, can swing not just an individual farmer’s balance sheet, but it can have great affects on the overall farm economy, the environment, conservation and air quality.
With the farm economy in a dip, now may be the time for urbanites to invest in their own piece of the country. These new neighbors may mean complications for rural landowners, and Lashmet advised taking the initiative and talking with them before trouble erupts into a nuisance lawsuit.
“Communicate with your new neighbors,” she said. “They may just not understand what we’re doing.” Lashmet said knowing your state’s “right to farm” statutes, and following the regulations within is key.
“They’re all different but they serve as an affirmative defense to agricultural operations facing a nuisance lawsuit,” she said.
There may very well be opportunities to diversify a farm’s income, too, when town starts getting closer.
“A lot of times, those land values start to increase,” Lashmet said. Another option, other than selling the land to developers, may be to diversify the farm’s activities into a pumpkin patch, or corn maze or those types of agritourism activities.
“There may be an opportunity for solar leases, wind leases, hunting leases, other ways to diversify your income that may pop up and be more lucrative,” she added. But, before signing any lease, she warns landowners to consult a knowledgeable attorney.
“Anybody looking to sign a wind or solar lease needs to be using an attorney that’s experienced in that area,” Lashmet warned. “We’ve had oil and gas leases around for about 100 years. These leases are still new and there’s still things we’re learning about how those are drafted and how they’ll be interpreted.”
For example, landowners should watch the length of a solar or wind lease.
“Solar or wind is often a 30- to 40-year lease,” she said. “For a lot of people, that’s not just a lease, that’s an estate plan.” She also said landowners might consider a clause calling for an escalation of payments they’ll receive over the life of a lease to account for inflation. Ask if the lease allows them to still use the land around the wind turbine or solar farm.
Landowners will also need to be aware how that lease will affect their property taxes and make sure that this venture won’t put them in the red because of an increase in property taxes, she added.
“Solar farms may take the land out of ag use valuation and increase your property taxes,” she warned. “The way you structure a lease may affect your Social Security income or your self-employment taxes owed. Or, even who gets the program payments at the FSA office.” Farmland and real estate values not only are indicators of the farm’s financial well-being, but they are usually the largest single part of a farmer’s investment portfolio, and for most the principal source of collateral for farm loans.
“This area is very complicated and I’d sure make sure that they use an attorney with lots of experience before I’d ever consider signing a lease,” Lashmet emphasized. “Before taking action, visit with any advisors you have to see what other impacts they might have.”
Communication is key
Change is a constant in farm country. Land changes ownership either through inheritance or by a sale. Farms change production methods and cycles, and diversify their operations into other outlets. But across all the changes, communication is the key, Lashmet said.
“Talking ahead of time with everyone involved can mean significant issues can be avoided down the road, whether we’re talking about a neighbor, or potential heir, or tenant, or whatever,” she said. There’s no place and time like today to sit down and talk about land and your plans for it.
Jennifer M. Latzke can be reached at 620-227-1807 or [email protected].