I was invited to the annual AG Horizons Conference, held 12/3/13 and 12/4/13 in Pierre, SD. Seven different small agricultural associations have their joint meeting. Of the three different talks to the group, this article will highlight some of the material from “Secret Advanced Tax Strategies”.
Farming has changed from when I was a kid, 60 years ago, growing up on the outskirts of rural Joliet and Kankakee Illinois. Then, many small-time farmers could support their families with a 160-320 acre farm and a part-time job during the winter. Today, farms are huge enterprises and some of the people I met farm 3,000-10,000 acres. Machinery is costly, with combing costs $ 300,000 or more. So, one needs a lot of acres to amortize the high cost of machinery.
In the past 5 years, there have been record crop prices, reaching as high as $ 7 per bushel corn; $ 16 per bushel soybeans; and $ 10 per bushel wheat. With high crop prices and large farms operated, net profit form farming is no longer small potatoes. A number of the farmers have net profits of $ 250,000 to $ 1,500,000 in a good year. So, they now have more cashflow than ever and therefore tax problems. They also have the cash to do things for the family that were previously unheard of. Let me cover their concerns as well as advanced strategies that are solutions:
• I have big profits and want to save income tax: Earlier in 2013, a big farmer came to one of my Mesa, AZ seminaries, as he's a snowbird with a house in Mesa. He's had as much as $ 1 million taxable income in the past. The solution was to establish a 401 (k) plan and defined benefit pension plan. We added his wife to the payroll and the combined contributions to his July 1, 2012 to June 30, 2013 fiscal year was just under $ 300,000. This will save him close to $ 100,000 of tax not just in year 1, but every year that he makes this tax-deductible contribution. As a side benefit, this will also provide a retirement income for the two brothers (non-family) who are his employees and are currently in their 30's. For the farmer, his future annual retirement income will exceed $ 100,000.
• None of my kids or grandkids wants to work the farm and I want to provide lifetime income to them: The solution is the Multi-Generational IRA with the Roth IRA conversion strategy. Here's how it could work for a farmer with 3 daughters and 4 grandkids. None of my client's 3 daughters (or their husbands) wants to work the farm. In fact, they have moved out-of-state. The 4 grandkids are too young to work the farm and since they will not grow up in the farm area, they will not know how to work it once they become adults. Suppose the farmer has $ 770,000 between his and his wife's traditional IRA. Suppose the average age of the 4 grandkids is 9. This strategy will create slightly above $ 8 million of tax-free income over the life of the 4 grandkids. After the farmer and his wife, currently in their late 60's, die, here's the projected income to each of the 4 grandkids: $ 7,000 at age 25; $ 11,000 at age 35; $ 17,000 at age 45; $ 27,000 at age 55; $ 43,000 at age 65; $ 69,000 at age 75; and $ 90,000 at age 80.
Summary: Farmers in rural areas typically have not heard of tax strategies such as the family 401 (k), defined benefit plan, Multi-Generational IRA, or the Roth IRA Conversion. These secret advanced tax strategies can save substantial taxes and provide lifetime income for the kids and / or grandkids. A future article will talk about how to guarantee a lifetime income to the farmers and avoid capital gains tax.