Farm Specific Issues in Estate Planning
The Farm Service Agency
Farm clients are a unique subset of estate planning clients. Their wealth is largely illiquid and many times they have no desire to see the illiquidity changed in the hands of their beneficiaries, to include their spouses. Frequently, they care slightly less about dollars in the hands of their off spring and more about preserving an economic enterprise. We have all heard that over and over, however, few talk about the operations of the farm as it relates to the Farm Service Agency.
Dealing with the Farm Service Agency is a part of life for the farm operation. A review of some of the documents and programs that farm operations must consider is important and as critical to an active farm operation as deciding who gets grandma’s tea set, if not more so.
Generally, most farms should have a FSA Form 578 production record available to the operator. Also, a Form 156 can provide information to the executor or estate planner regarding the operation. This data drives the potential valuation of the farm.
Form AD-1026 is a document that provides advance determination of a farm’s highly erodible soils and wetlands. This document may or may not exist contemporaneously at the local USDA service center. Farm operations should make sure copies of this document are part of the “permanent record” as it establishes what production practices are authorized. This is especially important where the operation has wetland areas.
Operators must follow conditions on any land owned or farmed that is highly erodible or that is considered a wetland. Producers and any person or entity considered to be an "affiliated person" of the producer, are subject to these conditions.
By certifying on Form AD-1026, producers agree they will not:
• Produce an agricultural commodity on highly erodible land without a conservation system;
• Plant an agricultural commodity on a converted wetland;
• Convert a wetland to make possible the production of an agricultural commodity.
Form CC 941: The form certifies that that for the three preceding years, the adjusted gross income of the person owning a portion of the operation was under $900,000. This is applied per person, meaning a married couple has no concerns until the 1.8-million-dollar mark is reached.
As farms increase in size, this must as important to consider as taxation and spendthrift clauses in estate plans.
As to government programs and the limits paid to participation, it is a per person limit. Who is a person is the key to understanding how the limits impact an operation? As operations get larger and children become more successful, this may impact the farm operation if they obtain a slice of it at their parent’s death.
How you operate impacts this as well. A general partnership is not a person. Each individual in the partnership is its own person. A husband and wife partnership is eligible for 2 payment limits (one for each of them). If the estate plan moves all the assets of the farm into an LLC, corporation or trust, the payment limitation is one limit. Additionally, moving land into an LLC precludes the LLC, unless it is a partner, from securing or guarantying the notes or operation of a tenant or operator of the ground. The correct placement of the operator into a separate trust, LLC or corporation can remove these payment limitation issues.
The USDA has a wide variety of programs a farm operation is potentially involved in here are some of the common ones.
• Ad Hoc disaster programs
Conservation Reserve Programs (production idling programs paying per acre land rent to the land owner) and Conservation Security Program (paying for production practices on whole farms to encourage general conservation techniques) and farm disaster payments are subject to a limit of $50,000 per person for CRP, $40,000 for CSP with disaster payments varying from authorization to authorization.
Landowners or tenants need to be considered actively engaged in farming to qualify for Price Loss Coverage or Ag Risk Coverage. This replaced Direct Payments and the other USDA production-based payment programs from earlier farm bills.
Agriculture Loss Coverage
With the removal of direct payment programs of the 1980s following some World Trade Organization rulings that considered the programs distorting to the world markets, the government had to develop another method of taking some of the wild swings and risk out of crop production. What they came up with are programs based on actual production reported. They developed two strains, the ARC and PLC programs.
The ARC (average revenue coverage) program provides revenue loss coverage at the county level. ARC-CO payments are issued when the actual county crop revenue of a covered commodity is less than the ARC-CO guarantee for the covered commodity.
Price Loss Coverage (PLC)
PLC (price loss coverage) program payments are issued when the effective price of a covered commodity is less than the respective reference price for that commodity. The effective price equals the higher of the market year average price (MYA) or the national average loan rate for the covered commodity.
The MYA price for a given crop year is used to calculate any potential payments for the programs. The historical MYA prices are also used to determine the benchmark revenues for program options. The MYA price for a given commodity is not based on the Chicago Board of Trade commodity prices, or any specific local or terminal grain prices. The MYA price is the 12-month national average price for a commodity, based on the average market price received at the first point of sale by farm operators across the United States. The USDA National Agricultural Statistics Service collects grain sales data on a monthly basis, which is then weighted at the end of the year, based on the volume of bushels sold in each month.
USDA updates the average MYA price estimates for a given marketing year in the monthly World Agricultural Supply and Demand Estimates report. USDA also publishes monthly and season-average estimated market prices for various commodities, which are available on the Farm Service Agency website.
The payments depend on MYA price levels on Aug. 31, or any adjustments made by USDA in the announced NASS yields to arrive at the final FSA county yields, which are used to calculate ARC-CO payments.
Producers must be enrolled in the one or the other program for corn and soybeans in order to be eligible for any payments.