Estate planning for farmers: Providing for liquidity concerns

Brian E. Ravencraft
Brian E. Ravencraft

To this day the old adage “….nothing in this world can said to be certain, except death and taxes” is quite true. However, many decades after Benjamin Franklin made the quote, estate planning was formed to proactively solve and minimize the “tax certainty” part of the quotation.

Farmers are basically businessman who own and operate a specialized type of business. They face basically the same estate planning problems that confront all businesses that operate as either sole proprietorships, a partnership or a corporation. The farmer and the estate planner must implement some unique strategies and techniques that will solve the estate planning problems, which particularly affect a farm business.

For example, farming frequently involves a substantial investment in farm assets (land, buildings, equipment, etc.), large borrowings carrying heavy interest charges, fluctuating income (or loss) from year to year because of diverse weather and market conditions, and rising land values. These factors require use of estate planning strategies that will minimize death taxes and estate administration costs, preserve liquidity of the estate and provide for a systematic and economic disposition (or continuance) of the farm business on the death of the farm owner. In addition, the estate plan should take full advantage of the special tax provisions designed to alleviate the special tax burdens of farmers. In this article we explore the estate planning liquidity problems farmers’ encounter and techniques used in minimizing the estate burden.

The estate of a farmer is frequently plagued by liquidity problems, which, because of the nature of the predominant estate assets (buildings, land, farm equipment and personal property), make it difficult for the estate executor to find readily available cash, or assets readily convertible to cash, with which to pay monetary legacies, administration costs, debts, taxes and other estate obligations. Planning to improve the liquidity of the estate before death can prevent losses which might otherwise be incurred through a quick or forced sale of estate assets to meet post-death obligations, can avoid the necessity of borrowing funds at possibly high interest rates, can avoid after-death disputes (and possible litigation) among beneficiaries over the sale of assets, and can reduce income taxes which might result from such sales.

Where an objective of the estate plan is to preserve as much of the farm business by the farmer’s heirs, proper planning for liquidity can minimize or eliminate sales of the farm assets.

Various steps may be taken under the estate plan during the estate owner’s lifetime to improve the liquidity of the estate. These include:

  1. Build-up of liquid assets

Where a farm is profitable or income from other sources is available to provide a surplus after taxes for investment, liquidity of the estate can be improved by investing surplus funds in liquid assets such as bank deposits and marketable stocks and bonds. In areas in which farm real estate is or will become a liquid asset because of developer demand, surplus funds may be invested in additional farm real estate without impairing liquidity.

The farmer should develop an overall plan for adequate estate liquidity through a build-up of liquid assets. The farmer and his financial team should make a current estimate of the monetary obligations, which will face the estate after the farmer’s death, and this estimate should serve as a rough guide to the amount of funds needed in the estate. Review the plan periodically to take into account changes in values of estate assets, since such changes may increase or decrease the estate’s need for liquid funds.

  1. Purchasing life insurance

Life insurance under a policy on the life of the estate owner can provide an appropriate amount of cash for the farmer’s estate, which can be used to meet estate obligations at his death. The purchase of life insurance for this purpose can substantially improve the liquidity of the estate. But also be aware that certain care must be exercised to minimize or eliminate estate tax on the life insurance proceeds.

  1. Use of buy-sell agreements

Where the farm is operated in partnership or corporate form, a buy-sell agreement among partners or stockholders can be used to provide that there will be a buyer for the farmer’s interest at his death, thereby furnishing his estate with funds from the sale. Such an agreement has other advantages and can be funded with life insurance to assure the buyer will have the requisite funds with which to purchase the decedent’s interest.

  1. Reduction of estate taxes

Steps taken during the lifetime of the farmer to reduce his estate taxes will improve the liquidity of the estate, since, apart from availability of funds, the amount needed to meet estate obligations is reduced. Such steps include a program of lifetime gift and qualification of the estate for special (farm) use valuation.

The steps to build liquidity mentioned in this article are certainly not all inclusive but meant to be a starting point for planning and minimizing estate taxes, especially those farmers with gross estate limits in excess of $5,450,000 (effectively $10.90 million per married couple). Overall estate planning should be an important consideration in the farming community. The farmer should consult with his advisors, determine the specific circumstances of his estate plan, and formulate a plan to establish liquidity and minimize taxes.


Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through

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