There were plenty of email and phone call questions from the Jan 28th Farm Journal/AgWeb webinar. Darren Carlson of Carlson & Burnett joined Mike Gustafson of Farmers First Trust on the webinar to provide the tax law behind MDPT and some examples of where it can provide value to farm and ranch land sellers.
Here are some of the questions that were emailed to us as well as some that were asked during phone conversations after the webinar. You can reach Darren at (402) 216-0361 and Mike can be reached at 800-480-8090 if you would like to talk through a question that is specific to your situation.
What is the downside risk of the transaction?
There are really two potential downside risks, from our perspective.
First, while not really a risk, it is attempting to utilize MDPT in a transaction that doesn’t have the size to merit the steps necessary to carry out the process. We document that the size of a farm or ranch sale should be at least $1M. For commodity sales, like grain or livestock, a lower amount will work if the ordinary income tax warrants the effort.
The second point is not developing a plan for the 99% cash loan received using MDPT. The premium financed life insurance will address the capital gains tax due at the end of the deferral. If the 99% is squandered or not managed to grow over time, a huge opportunity has been missed. The power of MDPTis that it is your plan with your decisions to grow for the future. One of the key reasons we require your CPA’s involvement in the transaction.
Can owners split the net sale and have their own separate 99% loan?
The short answer is yes. If the owners are siblings, for example, each can set up their own SPE (special purpose entity) and defer their portion for the length of time they decide (but not more than 30 years).
The longer answer is based upon some very complex ownership incorporation that some have for their farms/ranches. Some farm land ownership structures will require an attorney’s involvement, like Darren Carlson of Carlson & Burnett, to provide an answer for your specific situation.
Does the life insurance need to be taken out at the time of the farmland sale?
Note: Premium financed life insurance was introduced during the webinar as a strategy to address the deferred taxes at the end of the MDPT deferral period.
No, the premium financed life insurance policy is not required to be in effect before the farmland sale closes.
However, there are several decisions that are required to determine the coverage, policy owner and financing arrangements in a premium financed policy. The answers to these decisions will provide the annual cost of the life insurance which will help set aside some of the 99% loan for the premium.
Also remember, insurability of the individual will be determined by the insurance company.
Where does the 1% go when I get the 99% loan?
All 100% of your net sale is in US Securities and it stays there for the deferral period.
Pegasus is the investment bank that loans the 99% based upon your net sale amount of 100%.
So the answer is … it doesn’t go anywhere!
Can I have a copy of the Creighton University Law Review that was mentioned in the webinar?
Yes, the link to the Creighton University Law Review written by attorney Darren Carlson can be found here.
Where has this been done before? And how often?
During the webinar, we showed a sample of some very large timber transactions (timber is considered agriculture) that were in the billions of dollars.
There are also numerous transactions that farmers and ranchers have done to defer income using tax code that has been around for decades. MDPT has provided a way to monetize the installment sale for farmers and ranchers.
The webinar talked a lot about farmland sales, how is MDPT different using for corn or cattle sales?
The same MDPT process is used for commodity sales.
Selling grain or livestock will defer ordinary income tax where farm or ranchland sales defer capital gains taxes.
Remember, MDPT has to be transacted when you deliver (sell) the grain or livestock to be utilized.
If you missed the original Jan 28th showing of the webinar, you can register with Farm Journal/AgWeb here and view it on demand.
Michael L Gustafson
Principal Farmers First Trust: 800-480-8090