Choosing the Correct Entities for Your Farming Operation

1. Choosing the Correct Entities for Your Farming Operation Farm consolidation and high input agriculture are having a devastating effect on rural America. Social and environmental devastation will be the end result if we continue down our current path. Without family farms we will become a much more dependent and economically vulnerable society. According to the National Family Farm Coalition, for every five farmers who go out of business, one Main Street business closes and three to five workers in the community lose their jobs. Farm consolidation and high input agriculture are having a devastating effect on rural America. Social and environmental devastation will be the end result if we continue down our current path. Without family farms we will become a much more dependent and economically vulnerable society. According to the National Family Farm Coalition, for every five farmers who go out of business, one Main Street business closes and three to five workers in the community lose their jobs.

2. Choosing the Right Farm Entity to Achieve Your Family�s Goal Few people realize that the combined taxes paid by the buyer and seller on a farm installment sale often total more than one and a half times the value of the land being transferred. In addition interest payments usually equal the total value of the land being purchased. Add these two up and they total two and a half times the value of the land being purchased. It is not difficult to understand why rural America is in trouble. It took twelve years and countless hours of research to find enough �free bridges� in the tax codes to make it possible for a farm to be passed with zero tax and zero debt. Few people realize that the combined taxes paid by the buyer and seller on a farm installment sale often total more than one and a half times the value of the land being transferred. In addition interest payments usually equal the total value of the land being purchased. Add these two up and they total two and a half times the value of the land being purchased. It is not difficult to understand why rural America is in trouble. It took twelve years and countless hours of research to find enough �free bridges� in the tax codes to make it possible for a farm to be passed with zero tax and zero debt.

3. Farming Entities Sole Proprietorship General Partnership Limited Partnership C-Corporation Limited Liability Company A farm transfer plan needs to be divided into three parts: Seller�s �exit strategy� spells out the needs and goals that must be met before the farm transfer can be deemed successful. Buyer�s �entrance strategy� spells out the steps necessary to meet the buyer�s needs and goals in an affordable manner. Buyer�s �growth strategy� should be a step by step plan on what they want to accomplish once they take over the farm. A farm transfer plan needs to be divided into three parts: Seller�s �exit strategy� spells out the needs and goals that must be met before the farm transfer can be deemed successful. Buyer�s �entrance strategy� spells out the steps necessary to meet the buyer�s needs and goals in an affordable manner. Buyer�s �growth strategy� should be a step by step plan on what they want to accomplish once they take over the farm.

4. Sole Proprietorship Advantages Simplicity Total Control No Extra Tax Returns 1. Adequate retirement income � Need assurance that they will have sufficient income that they cannot outlive. 2. Acceptable farm succession plan � A plan that will guarantee that the land will pass to an owner/operator at the farmers death. Treat all heirs equitably � Ability to divide their assets in a manner that all heirs will consider fair. Opportunity to help community � Just taking care of the above items is a large contribution but many would like to do something a little special. 1. Adequate retirement income � Need assurance that they will have sufficient income that they cannot outlive. 2. Acceptable farm succession plan � A plan that will guarantee that the land will pass to an owner/operator at the farmers death. Treat all heirs equitably � Ability to divide their assets in a manner that all heirs will consider fair. Opportunity to help community � Just taking care of the above items is a large contribution but many would like to do something a little special.

5. Sole Proprietorship Disadvantages Can�t add Next Generation or Partners Does not Take Advantage of Passive Rental Income Difficult to Use Within Estate Plan No Discounting is Allowed Difficult to Transfer Ownership No Asset Protection Fear of Outliving Their Money Life expectancy has increased by 30 years in the last century. Result is many more years in retirement Cash flow was not sufficient to save for retirement. Excess cash always plowed back into the farm Minimal Social Security benefits due to low farm taxable income over the years Leaves them dependent on the farm land and farm assets to provide adequate retirement income Fear of Outliving Their Money Life expectancy has increased by 30 years in the last century. Result is many more years in retirement Cash flow was not sufficient to save for retirement. Excess cash always plowed back into the farm Minimal Social Security benefits due to low farm taxable income over the years Leaves them dependent on the farm land and farm assets to provide adequate retirement income

6. General Partnership Advantages Allows for Partners and Entry of Next Generation Allows for Multiple Governmental Program Credits (Direct Payments) No Limit of Number of Partners Easier to Use Within Estate Plans

7. General Partnership Disadvantages No Asset Protection Additional Tax Return Does Not Allow for Passive Income Difficult to Transition to Next Generation and Exit From May Dissolve With Death or Disability of General Partner

8. Limited Partnership Advantages Allows Some Asset Protection to Limited Partners Allows for Entry of Next Generation Can Retain Control by Being General Partner Discounting is Allowed Works Well With Estate Planning

9. Limited Partnership Disadvantages Does not Take Advantage of Passive Rental Income No Asset Protection to General Partners Legal Dissolution With Death or Disability of General Partner Requires use of Corporation or LLC as General Partner in Estate Plans Additional Tax Returns and Bookwork

10. C-Corporation Advantages Allows Asset Protection of Personal Assets From Risks of Corporation Allows for Entry of Next Generation Allows for Extra Tax Deductions Allows for Passive Rental Income Continues to Operate After Death or Disability of Shareholder

11. C-Corporation Disadvantages Corporation Not Protected From Personal Risks More Complicated Tax Advantages Mainly for Larger Operations Farm Operation Must Consistently be Profitable Many Farms Can�t Take Advantage of Fringe Benefits Because of Cash Flow

12. Limited Liability Company Advantages TOP DOWN and BOTTOM UP asset protection in Certain Jurisdictions (Wyoming) Allows for Great Discounting in Certain Jurisdictions (Wyoming) Allows for Passive Rental Income Easy Entry of Next Generation Great Tool in Estate Planning

13. Limited Liability Company Disadvantages Guaranteed Payments Subject to SE Tax More Complicated Than Sole Proprietorship Use of Wyoming Requires Registered Agent

14. So far we�ve been talking about the farm as if it were one large asset. Actually the farm is a combination of two distinct assets. The land is one asset and everything else; grain, machinery, livestock, etc. are actually a separate asset. The land is covered under one set of laws and tax consequences. The grain, livestock, machinery, etc. are covered separately under others. PRA� separates them and addresses them as two distinct transfers. So far we�ve been talking about the farm as if it were one large asset. Actually the farm is a combination of two distinct assets. The land is one asset and everything else; grain, machinery, livestock, etc. are actually a separate asset. The land is covered under one set of laws and tax consequences. The grain, livestock, machinery, etc. are covered separately under others. PRA� separates them and addresses them as two distinct transfers.

15. Advanced Collaborative Planning This diagram is used to show the parts involved and the entities that may be needed to complete the farm land transfer. Dad & Mom establish a limited partnership to hold and manage the farm land. They place the farm land into it and name themselves as General Partners, to initially manage it. A second limited partnership, called the �Farm Transfer� LP is established to purchase the farm land. This LP holds the funding vehicle to purchase the farm land and has a �buy-Sell agreement between the farm land LP and itself.This diagram is used to show the parts involved and the entities that may be needed to complete the farm land transfer. Dad & Mom establish a limited partnership to hold and manage the farm land. They place the farm land into it and name themselves as General Partners, to initially manage it. A second limited partnership, called the �Farm Transfer� LP is established to purchase the farm land. This LP holds the funding vehicle to purchase the farm land and has a �buy-Sell agreement between the farm land LP and itself.

16. Planning Using Advanced Collaborative Planning Plans Customized to Meet Clients Hopes, Dreams, Goals and Aspirations Multiple Disciplines Used to Create the Best Possible Plan for the Client Farm Succession and Operation is Completed in a Manner That Works for the Whole Family Keep farm in farmer and spouses possession until last death to provide rental income. This income could increase as inflation drives up land values. Doubles the retirement income obtained from sale of inventory and depreciated machinery by avoiding recapture and income taxes. Increase retirement income by avoiding capital gains taxes on sale of business assets. Make it possible to establish a farm equity loan so couple can dip into real estate value.Keep farm in farmer and spouses possession until last death to provide rental income. This income could increase as inflation drives up land values. Doubles the retirement income obtained from sale of inventory and depreciated machinery by avoiding recapture and income taxes. Increase retirement income by avoiding capital gains taxes on sale of business assets. Make it possible to establish a farm equity loan so couple can dip into real estate value.

17. Farm Succession Solution Break Estate into Separate Parts

18. Farm Succession Plan Developed Plan is Designed to allow for Possible Entry of Farming Child Into Current Business Plan is Designed to Allow for Transfer of Farm Operation Either During Life of Parents or Upon Their Death Thru Inheritance

19. Farm Operation Transfer Farming Operation is Formed Operational entity allows for maximum tax saving and future transitional planning Farming Operation may be owned until death, sold or gifted. Farming Parents may retain 100% Control Buy/Sell Agreement or Right to Purchase used when needed Plan developed to deal with possible disability PRA�S APPROACH TO FARM SALE Keep land ownership with seller and spouse until last death. Farm purchase for cash at last death avoids capital gains taxes for the estate and provides a step-up in basis for the buyer. Guarantees cash rent payments, inflation adjusted, until the last death. Purchase agreement allows for buyer replacement without changing the final outcome. Guaranteed cash sale at death may allow seller and spouse to establish a farm equity loan so they could supplement their retirement income by drawing against their farm equity should it become necessary. PRA�S APPROACH TO FARM SALE Keep land ownership with seller and spouse until last death. Farm purchase for cash at last death avoids capital gains taxes for the estate and provides a step-up in basis for the buyer. Guarantees cash rent payments, inflation adjusted, until the last death. Purchase agreement allows for buyer replacement without changing the final outcome. Guaranteed cash sale at death may allow seller and spouse to establish a farm equity loan so they could supplement their retirement income by drawing against their farm equity should it become necessary.

20. Farm Land Transfer - Farm Land is either owned individually or in Revocable Living Trusts or in possible entity Privacy � avoids probate Allows for Complete Control Avoids capital gains taxes Maximizes estate tax avoidance Step up in basis Flexibility to replace buyer Buy/Sell or Right to Purchase used to transfer land to farming child PRA�S APPROACH TO FARM SALE Keep land ownership with seller and spouse until last death. Farm purchase for cash at last death avoids capital gains taxes for the estate and provides a step-up in basis for the buyer. Guarantees cash rent payments, inflation adjusted, until the last death. Purchase agreement allows for buyer replacement without changing the final outcome. Guaranteed cash sale at death may allow seller and spouse to establish a farm equity loan so they could supplement their retirement income by drawing against their farm equity should it become necessary. PRA�S APPROACH TO FARM SALE Keep land ownership with seller and spouse until last death. Farm purchase for cash at last death avoids capital gains taxes for the estate and provides a step-up in basis for the buyer. Guarantees cash rent payments, inflation adjusted, until the last death. Purchase agreement allows for buyer replacement without changing the final outcome. Guaranteed cash sale at death may allow seller and spouse to establish a farm equity loan so they could supplement their retirement income by drawing against their farm equity should it become necessary.

21. Treat Heirs Equitably Estate receives cash for non liquid farm land Each heir receives inheritance in cash Including the buying heir Siblings live in harmony Estate saves taxes through specialized estate plan TREAT ALL HEIRS EQUITABLY PRESERVING RURAL AMERICA�S APPROACH Farm sells for cash at last death to an owner/operator. Estate is liquid so each heir receives their equitable distribution in cash including the farm buyer should that be a family member. All heirs live happily ever after. TREAT ALL HEIRS EQUITABLY PRESERVING RURAL AMERICA�S APPROACH Farm sells for cash at last death to an owner/operator. Estate is liquid so each heir receives their equitable distribution in cash including the farm buyer should that be a family member. All heirs live happily ever after.

22. Farm Succession Planning Mom & Dad retire comfortably Clients� goals are met with customized estate plan Farm transferred to active farmer Flexibility to change buyers All heirs treated equitably Cash available at time of inheritance Tax savings stays with family or possibly goes to the community

23. The Successful TransferAbility to Treat Heirs Equitably Doesn�t this plan make a lot more sense?Doesn�t this plan make a lot more sense?

25. Example John & Mary Dealer 3 Children (2 daughters & 1 son -Farming) 500 Acres @ $2200/acre = $1,100,000 Dairy Cows = $300,000 Machinery & Equipment = $200,000 Farm Building Site = $400,000 Liquid Assets & Life Insurance = $300,000 Total Assets = $2,300,000

26. Example � No Planning Son Unable to Buy Out Sisters� Interests Son Forced to Farm with Sisters Exposed to Possible Divorce or Creditor Problems Farming Child and Siblings Federal Estate Tax ~ $270,000 State Estate Tax ~ $122,800 Assets Must be Sold to Pay Tax

27. Farming Operation � Part 1 Develop Tax Saving Strategies and Transfer Plan for Farming Operation Possibilities Include Incorporation or LLC Rental of Land & Building Discounting of Shares / Membership Units Gifting of Shares CRT as Possible Exit Strategy Buy/Sell Agreement

28. Farming Real Estate � Part 2 Rental Agreement for Life Provides Adequate Retirement Income Possibly Buy/Sell Agreement with Active Heir Business Real Estate to Active Heir Subject to Payment to Estate Lifetime Trust Shares for Creditor , Divorce Issues � Keeps Real Estate in Family Possible Use of ILIT/Limited Partnership with Life Insurance

29. Results Farming Real Estate & Operation to Active Heir Cash Divided Equitably to Other Heirs Protective Trust Shares Zero Federal Estate Tax Due State Estate Tax Reduced or Eliminated Step Up in Basis Annual Income Tax Savings Adequate Retirement Income

30. (Seminar ending) We are offering an initial private consultation at no cost, so that we can answer your personal questions. ______ has offered to let us meet with you at their office conference room and ____ is here to schedule those appointments. She�ll go around the room now with a daily planner to make those appointments with each of you. When you schedule that meeting, she will give you the booklet, �A Failed Tradition � �The Installment Sale Dilemma��. While she does that are there any general questions that we can answer? (Personal meeting ending) Let�s spend a few minutes and show you a sample of a PRA program design book that we can do for you. As you can see� (leave this page up�)(Seminar ending) We are offering an initial private consultation at no cost, so that we can answer your personal questions. ______ has offered to let us meet with you at their office conference room and ____ is here to schedule those appointments. She�ll go around the room now with a daily planner to make those appointments with each of you. When you schedule that meeting, she will give you the booklet, �A Failed Tradition � �The Installment Sale Dilemma��. While she does that are there any general questions that we can answer? (Personal meeting ending) Let�s spend a few minutes and show you a sample of a PRA program design book that we can do for you. As you can see� (leave this page up�)