Legal Considerations in Farm Transitions with Darlene Livingston and Jody Anderson Leighty

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Show Notes

Jody Anderson Leighty

 

Summary

On the third and final episode of our Farm Transition Planning series, guest host Darlene Livingston, Executive Director from PA Farm Link interviews Jody Anderson Leighty, attorney with Stock and Leader in York, PA. We explore legal considerations in farm family transitions, and Jody shares her expertise. We also dive into the issues that come along with succession planning, business planning and more. 

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Transcript

Johanna Rohrer:

Welcome back to the AgVocates podcast. I'm Johanna Rohrer, Outreach and Educational Program Specialist here at Farm Credit.

Today, we will explore the final episode of our Farm Transition Planning podcast series with our guest host, Darlene Livingston, from Pennsylvania Farm Link. Remember, if you missed the first and second conversations within the series, we encourage you to go back and explore those episodes as well.

During today's episode, we will talk about considerations for Pennsylvania farm family succession planning, business planning, and more. Many topics discussed in this episode will reference Pennsylvania state-specific examples. I'll kick it over to Darlene to get us started with our final episode.

Darlene Livingston:

I'm Darlene Livingston, your host and also Executive Director of Pennsylvania Farm Link and operate a livestock and crop farm with my family in Indiana County.

Today's guest is Jody Anderson Leighty, attorney with Stock & Leader, a law firm in York, PA. Jody has a passion for agriculture and helping farmers put succession and estate plans in place. She'll share her perspectives on legal considerations for farm transition.

Jody, thanks for joining the podcast.

Jody Anderson Leighty:

Thanks for having me. I appreciate it.

Darlene Livingston:

Let's start by having you tell us more about yourself and why agriculture is important to you.

Jody Anderson Leighty:

I grew up in South Eastern York County in Pennsylvania. I am the granddaughter of beef cattlemen on one side of my family and orchard and fruit producers on the other side of my family. I still live in the area, close to my mom's family farm. Our area is still very agricultural in nature. I really respect and admire the farming community. I feel fortunate to still live in a farming community and to be able to serve them.

Darlene Livingston:

I've always found those with agriculture roots are also those who serve farmers best, so thank you, Jody.

Farm transitions can be overwhelming.

What's the first step that any farm family should take to prepare for the successful transition process?

First Step in Preparing for a Farm Transition

Jody Anderson Leighty:

I think the first step is really to create a team to help the family accomplish the transition. Creating a team takes a good accountant, financial advisor, and an attorney to all work with that family to achieve the transition and make it successful.

The second step is to verbalize with the members of the family. You need to have those hard conversations and talk about the elephants that are in the room. Your accountant, financial advisor, and attorney can help guide you through those conversations.

Darlene Livingston:

Let’s talk about everyone’s favorite topic, taxes.

Could you walk our listeners through the tax implications of transitions?

Tax Implications of Transitions

Jody Anderson Leighty:

There are essentially three taxes that you have to be aware of, the Pennsylvania Inheritance tax, Federal Capital Gains tax, and Federal Estate and Gift tax.

The Federal Estate and Gift tax is not as much of a factor as it used to be. The amount that you can give away, either during your lifetime or at your death, has been increased to about $11.5 million per person. That means that there is no federal estate or gift tax assessed until you have given away more than $11.5 million per person, or about $23 million per couple. This is also the one that they call the death tax that Congress changes every now and again. It's definitely something to keep your eye on and to keep yourself apprised as to what's going on because that amount can change.

In terms of the Pennsylvania Inheritance tax, it doesn't matter if you pass away with $1 or $1 million, the Pennsylvania Department of Revenue wants their share. The tax rate is based on the relationship between the person that passed away and the person that inherits.

If the person that inherits is a spouse, there is 0% tax. If anything is inherited by direct lineal descendants; children, grandchildren, great-grandchildren, parents, grandparents, the tax rate is 4.5%. For siblings, the tax rate is 12%, and for everybody else, it's 15%. The great thing about this tax is that our legislature has passed two agricultural exemptions.

The first is that it exempts agricultural property, with certain requirements. It must be inherited by members of the same family that includes siblings, nieces, and nephews. This exemption includes all agricultural property, both land and buildings. It does require a yearly certification for seven years to prove that the land has produced agricultural products of at least $2,500 a year. It has to be physically farmed by that family, you can't lease out the ground to somebody else.  

The other agricultural exemption only applies if direct descendants inherit it. It only applies to the land, it does not apply to buildings on the land. It applies to agricultural commodities and does not require a certification. We're very fortunate in Pennsylvania that our legislature recognized the importance of agricultural and farmland being retained by the next generation to continue the family farm. These exemptions are a real benefit to our agricultural families.

If you sell something, the capital gains tax that you have to pay is determined by your basis, or what you paid for that property. A simplified version is that if I buy an investment property for $100,000 that would be my basis. If I sell that investment property for $125,000, I have made a gain of $25,000, and that will be subject to the capital gain's tax.

If I inherit the family farm when my parents pass away, I get a step up in basis. My basis would be the value of the farm at the date that my parents passed away. If my parents gift me the farm, I take their basis. If they bought the family farm in 1967 for $8,500 that would be my basis. If they were gifted the property from my grandparents, their basis was whatever their grandparents paid for it.

When you are gifted an asset or gifted a farm, your basis is very low. If you sell an agricultural preservation easement or any of the farm, there will be substantial capital gains tax implications as a result of that. If you wait and inherit it, you get that stepped-up basis. Your basis is the fair market value of the farm and you won't get hit as hard with capital gains tax. It typically is always better to inherit than to be gifted assets during your lifetime from a purely tax perspective. Unfortunately, there's other considerations in the mix that make it a little bit more questionable about whether you should gift or whether you should allow someone to inherit.

Darlene Livingston:

Thank you very much, Jody. I know it's a complex topic. I really appreciate the way you have given us information on taxes and the gifting process.

I've heard you say before that the biggest threat to the success of a family farm isn't taxes, its long-term nursing care.

Help us to better understand the implications of Medicaid and the five-year look-back in relation to farm transitions.

The Biggest Threat to the Success of a Farm Family

Jody Anderson Leighty:

Thirty years ago the biggest threat to family farms were in fact taxes, but now it is long-term nursing care. There's a couple of ways to look at this. The real issue has to do with the Medicaid program.  

Medicaid is what will pay for your nursing home care if you medically qualify and if you don't have assets to pay for your nursing home care on your own. There's two parts to this conversation, qualifying for Medicaid and the Estate Recovery Program. This program is where the state tries to get reimbursed for anything that they've paid on somebody's behalf that was on Medicaid.

To determine who qualifies for Medicaid, a resource assessment to determine what the person owns is done on the person going into the nursing home.  Based on that, they'll determine whether or not that person will qualify for Medicaid. If they don’t, they will look at how much of their own money they would have to spend down in order to qualify for Medicaid.

When they look at the resources that are available to pay for nursing home care, your primary residence, car, or income-producing property are not considered to be available to pay for your nursing home care. That means that nobody's going to come knocking on the farmhouse door and say that you have to sell the farm to pay for grandma's nursing home care. If it's income-producing property, the income will have to be put towards the nursing home care, but the asset will not have to be sold. Everything won't have to be sold to pay for nursing home care. Someone can qualify for Medicaid and still own income-producing property.

The problem comes in when that person passes away. When that person passes away, any assets will go through their estate will be subject to the Estate Recovery program of Pennsylvania's Department of Human Services to be reimbursed. If Medicaid paid $40,000 of nursing home care, they'll put a lien against the estate to be reimbursed the $40,000 in nursing home care. If the family wants to retain the assets of the person that passed away, they would need to come up with the funds to pay that estate recovery lien.

Some people say that they don’t want the person to die owning the farm, they want to gift it or sell it. The problem with gifting it all away is that when someone fills out a Medicaid application after they've run out of money, they need somebody to pay for the nursing home care. One of the questions on that application asks if you have made a gift within the previous five years. If you answer yes, then a calculation is done to determine how long the nursing home resident is ineligible to receive Medicaid benefits because of that gift. They essentially divide the value of the gift by the average monthly nursing home cost, which tells you how many months that nursing home resident is ineligible for Medicaid.

At the time of that calculation, the nursing home resident has already run out of money, so then you would be in a situation where somebody is going to have to pay for that ineligibility period. Once the ineligibility period is complete, the nursing home resident will go on Medicaid and their monthly bills are paid for. Ideally you would want to make sure that you gift at least five years before needing Medicaid, but no one knows when that will be.

Darlene Livingston:

I know the taxes and Medicaid are both complex subjects. We really appreciate you walking us through a basic understanding. We know there's much more involved, but we appreciate you explaining some of the basics to us.

You've worked with plenty of families transitioning farms over your career.

What have you found are the keys to successful transitions?

Key Factors to a Successful Transition

Jody Anderson Leighty:

You have talked about this on previous podcasts and you do such a good job helping families with this topic, but it really is communication. Communicating with everybody that's involved, even those that are off the farm is very important. Having those open and honest conversations is hard, but they need to be done.

I think the other one is paying attention to the detail and following through. It is so easy to get weary and fatigued with the transition process because of the hard decisions that have to be made. Not wanting to hurt anyone’s feeling, but also realizing that it’s impossible to treat everyone the same or equally can be very challenging. This is where that whole concept of fair doesn't mean equal comes in. The ones that are unsuccessful are the ones that don't finish. They get halfway through, but then avoid the hard conversations and realities and then it’s a mess and relationships can be ruined.

The last key to a successful transition is starting early. Don’t wait until the patriarch is 70 years old to start. If it feels like it’s too early, than you're probably starting on time because it takes a while. There needs to be mentorship between the older and the younger generation as well.

Darlene Livingston:

I would agree with everything you said. I have worked through a transition with our senior generation for our farm and I will fully admit that we started too late. Your points are right on from my experiences.

I really appreciate your insights and your assistance in helping our farmers learn more about the best practices. As part of our podcast series, we are asking everyone one final sign-off question.

What is one piece of advice farm families should remember while embarking on a family farm transition?

Advice to Remember while Going Through a Farm Family Transition

Jody Anderson Leighty:

I would say to assemble a team of trusted advisors that you're comfortable with and that are comfortable with each other. Your team will help guide you through this process and to give you that push when you do get tired or you don't want to have hard conversations. You team can guide your through the finish line of a family farm transition.

Darlene Livingston:

I think that's great advice, especially to help address the questions that are hard to ask.

Jody, we are grateful for your willingness to share your time and expertise with others. Thanks so much for your time today.

Jody Anderson Leighty:

Thank you for having me. I really appreciate it.

Johanna Rohrer:

Thanks so much for hosting, Darlene. We can't thank Pennsylvania Farm Link enough for joining us on this journey and sharing key insights for successful farm family transitions. Visit PAFarmLink.org to learn more.

Remember to rate, review, subscribe, and share this podcast with a friend. Get podcast notes and to subscribe to email alerts, visit mafc.com/podcast. If you have a topic or guest suggestion, you can email us at  podcast@mafc.com.

 

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These materials are provided for educational and informational purposes only and do not constitute legal advice, financial advice, tax advice, nor investment advice on any matter. These materials may not be current and up-to-date. You should not act nor refrain from acting based on these materials or the information they contain without seeking legal advice from an attorney licensed in your jurisdiction or other appropriate professionals. MidAtlantic Farm Credit, ACA expressly disclaims any liability for all acts and omissions taken or made in reliance on these materials or any information contained in these materials.