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Farming Across Generations 

Applicability of Agricultural Easements. Thirty farmers, landowners and County agriculture preservation staff were invited to hear speakers address the strengths of agricultural easements in the financial and estate planning for farms.  The Dec. 9 event at the Chatham Methodist Church was sponsored by the Brandywine Conservancy, S.A.V.E., and CFACE.

Agricultural Easement Definition. An agricultural conservation easement is a legally binding document that restricts the use of land to agricultural purposes. The farmer retains ownership of the parcel and all other rights to the land, but sells the development rights of the parcel at a price up to the appraised value of the farmland.  In Chester County there are two programs that purchase agricultural conservation easements and many municipalities partner with the County to provide funding. As an example, if a 100 acre farm were appraised at $10,000 per acre and were accepted into the  agricultural easement program, the farmer would receive up to $1,000,000, own the farm, be permitted to continue to operate the farm, and could sell the parcel as a  farm .The land would be restricted from future residential or commercial development.

Introduction. John Goodall, Western Area Manager of the Brandywine Conservancy described the abundance of excellent farmland in Chester County that was being lost from farming by market and development pressures.  A critical transition for any farm operation is the ability to pass the farm from one generation to the next.  Estate taxes (45%) and the development value of land make the land transfer from parents to children or grandchildren challenging, complicated, and potentially expensive. 

Impact of Eased Lands. John introduced a study of London Grove Township farmland west of Rt. 41 performed by West Chester real estate appraiser William Wood.  Wood concluded that “eased land, if sufficiently concentrated, creates a “cluster” or commonality of use which supports Market Value, often in the face of the more highly fluctuating values of development land”.  When enough adjoining farms are conserved they form a critical mass of eased land and create an “amenity value” that can more than compensate for the loss of the “development” value. Within a block of conserved lands, a potential buyer of a property protected by an agricultural easement knows that the surrounding lands are eased and will remain in agriculture in perpetuity. This amenity is much sought after and increases the market value of a property.  In reviewing recent local sales eased properties had values equivalent to unprotected properties that could be sold for residential development. Hank Deterring, chair of the open space committee in Londonderry Township, described how this phenomenon increased the value of a farm property recently preserved by his Township.

Banker’s Perspective: Liquidity. John introduced the guest speakers, Roger Rohrer, a bank lender, and James Clark, a lawyer/accountant who outlined the basics in farm lending and estate planning, including the role and benefits of agricultural easements. Roger is a part-time farmer and agricultural lending agent for Fulton Bank. He described land as possessing a bundle of different values including mineral rights, agricultural value based on soil classification, and development value. He described the potential tax benefits obtained when an agricultural easement value of a property is lower than the development value of the property.  Mr. Rohrer pointed out that a significant value of an agricultural easement is the “liquidity” it provides when cash is needed to move a farm operation forward.  The land can always be sold, but once it is gone, the farming stops.  The agricultural easement is a vehicle that can generate critical income without stopping the farming.

He laid out the planning and considerations that should be made when the income from an agricultural easement commitment is released.  These included:

• Getting good advise from professionals,

• Preparing for the capital gains on the new income, and

• Identifying the debts or capital investments to be addressed. 

He also pointed out that surrendering the development rights would reduce the appraised value of the land, which would reduce the value of the estate that is exposed to 45% inheritance tax.  Another key aspect of selling development rights is that it provides cash that can be distributed to non-farm children within a family to help balance the distribution of resources when farmland is passed on to the next generation of farmers.

Attorney’s Estate Planning Perspective: Lower Taxes. James Clark comes from a farm family and is an attorney / accountant focusing on estate planning.  His professional challenge is to reduce the tax burden for clients.  He spoke about the tax obstacles to be considered by farmers. Under Clean and Green or Pa Act 319 Pennsylvania farmland is taxed according to its agricultural value, not its developed value, but as farm values increase, so do the taxes.  Capital gains taxes (15% to 20%) are an important factor in transferring land from one generation to the next when land purchased years ago has appreciated. He described how the original purchase price or “basis” of a farm is subtracted from the current market value when it sells to determine the amount subject to the capital gains tax.  For example, a 100-acre farm bought at $1000 an acre 35 years ago might have a current market rate of $15,000 an acre.  At 15%, the capital gains tax would be over $200,000 ($15,000-$1,000 x 0 .15= $210,000).

The federal estate tax (45%) is a formidable obstacle in transferring farm operations to the next generation. Currently any assets above $3,500,000 in an estate are subject to 45% tax.  Agricultural easements can reduce the size of the estate subject to taxes.  Also Pennsylvania evaluates farmland as per its Act 319 (agricultural) value for estate purposes.  If the land value exceeds the $3.5 million exemption, a land sale with a 15% capital gains tax would be a better strategy than paying the estate tax of 45% for everything over the exemption, but that would still leaves a large tax bill to be addressed.  This bill can be deferred with a 1031 property exchange where the sale income is used to buy another property of equal value.

Mr. Clark described Credit Shelter Trusts for a deceased spouse to transfer his/her estate to the living spouse before passing on to their children. A disclaimer can be attached so the survivor can let it go through. In terms of the farm business, he strongly recommended corporate structures (LLC, LP, or LLP) for limiting liability and suggested reviewing any partnership arrangements that were active. He advised everyone to review their will and to ask four basic questions:

• Who gets what,

• When do they get it,

• How to minimize taxes and expenses, and

• How to pay remaining taxes and expenses?

He mentioned Revocable Living Trusts, Charitable Remainder Trusts and Wealth Replacement Trusts as vehicles for simplifying probate and avoiding taxes.  In the context of estate planning, the agricultural easement was a useful tool because it reduced the value of the land both in the overall value of the estate or in figuring the value exposed to capital gains. The most important message from Jim Clark was for farm families to plan for the future through the development of a tax strategy and not let unpredictable future events dictate the disposition of the family farm.

Summary.  Farm families who want to keep the family farm have many tools at their disposal when trying to meet the different needs farm owners and their heirs. These include agricultural conservation easements.  Professionals with an understanding of the challenges facing farm families and  knowledge of the easement application process, bank lending options, and tax law can help the farm family navigate through the complexities of farming across generations.