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How Will I Retire?

‘How will I retire?’ seems to be a simple question that almost every farmer ‘getting up there’ in years should be able to answer. But not so fast. Owning and operating a farm for decades leads to the accumulation of a lifetime of memories and a significant amount of assets. Machinery, land, buildings, grain bins, irrigation systems and drainage tile are just a few of the assets that create the balance sheet of every farmer looking to retire. How the retiring farmer manages those assets in a way that doesn’t send a large portion to taxes is a challenge. So, what does the farmer do?


The answer…it depends.


Each farm operation has a different view of what retirement means to them. According to the “The Iowa Farm and Rural Life Poll” published in August 2015 by the Iowa State University Extension and Outreach, “farming is such an important part of [a farmer’s] identity that retirement is very difficult.” While their poll was focused on Iowa farmers, I suspect the sentiment is consistent for farmers in other states.


The report goes on to inform that “Fifty-five percent of farmers who indicated that they would retire in the next five years had identified a successor. Fewer than half of the farmers in the remaining retirement categories had identified a successor.” The survey reported numerous other statistics on farmer’s plans to retire and how they would manage the succession to ‘cash out’ or transition parts of the operation.


The one consistent challenge in any of the retirement or succession plans is taxes. Federal and state taxation can remove a significant portion of the value of any transition strategy, unless planned correctly.


Let’s try something different. What if…


Let’s focus on the retiring (or semi-retiring farmer). What if the farmer could sell assets…grain, livestock or land, defer the taxes (Federal and state), yet receive cash for up to 95% of the net sale as a loan just days after sale close? Here is how it works.


Let’s say that the farmer has grain stored from the last year of farming. He may want to keep the land and cash rent it (because none of their children want to farm) to the neighbor. When it comes time to sell the grain, there aren’t any expenses to offset the cash grain sale. Ordinary income taxes could take up to 37% of the income!


But this time, the retiring farmers does the following. Let’s say he cleans out the bins and there is $1M of grain sold to the local elevator. Instead of taking the $1M (and paying taxes), the money stored in U.S. Treasuries (through Farmers First Trust). The farmer goes to Pegasus Farm Credit LLC and gains a loan of up to 95% of the original sale, in cash. The farmer can invest, buy land, diversify, etc. with the cash because it is his and the taxes are deferred for up to 30 years!


The farmer’s original sale dollars are stored, for safe keeping, in U.S. Treasuries. However, he will still receive yield from the Treasuries to help offset most of the loan interest paid to Pegasus Farm Credit LLC.


Then what?


In our example, if the farmer was in the top federal tax bracket of 37%, he could be paying up to $370,000 in taxes (plus state taxes) …ouch! But when he defers those taxes, he can invest the $370,000 for up to 30 years in anything he wants (actually the entire $1M can be invested). There is an opportunity to double or triple that amount over the deferral timeframe. It takes careful planning and management of those investments and proceeds can also be used for living during the deferral timeframe.


The Power of Present Value


One of the most powerful (and misunderstood) financial laws is present value. The present value of money is simply that a dollar today is worth more than a dollar tomorrow, because of inflation. So, if you can defer paying anything into the future you will be paying with cheaper dollars compared to today. Based on an inflation rate of 3% the value of $370,000 is going to be reduced to $152,435.10 in 30 years, compared to today’s dollars.


It is indeed a rare situation where you can defer your taxes, have the opportunity to amass increased asset value and pay with cheaper dollars in the future. This is a powerful way to preserve the value of your farm.


Your Team


Over the course of your farming career you have relied upon bankers, seed companies, fertilizer experts, crop scouts and implement dealers to help you navigate each crop year. To navigate your entry into retirement you will need a team with several new skills. You will require an attorney, CPA and financial planning team to guide you through to maximize this opportunity. It is truly an opportunity that provides the necessary ‘lift’ into retirement.



    © 2020 by Farmers First Trust Company DST

    The information contained within this web site is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a tax attorney or professional tax planner.  Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein.  Farmers First Trust Company DST utilizes the monetized installment sale approach for farms and farming

    purposes in the United States of America only.