Farmer: “When I defer the taxes and if I pass away before the deferral time frame, who pays the taxes?”
Farmers First Trust: “Your children or whomever you have in your succession plan would pay the taxes due in the year of the deferral end.”
Farmer: “I don’t want my kids stuck with the taxes.”
Farmers First Trust: “You will have 20 – 30 years to grow the deferred tax dollars and if managed properly, you could have up to 2-3 times the original amount, more than enough to pay the taxes.”
Farmer: “I don’t want my kids stuck with the taxes.”
Responsibility and ownership are two steadfast hallmarks of farmers. The short discussion (above) is repeated in almost every conversation we have had with farmers reviewing MDPT and deferring capital gains and ordinary income taxes into the future. The first thing farmers think about is their children and grandchildren.
I understand the sense of responsibility and ownership, my farmer parents had it and exhibited it in their decision making with their kids. However, Farmers First Trust is not an investment or wealth management firm, but the farmer’s question needs to be addressed. Monetizing the installment sale using section 453 of the US Tax code provides the opportunity for farmers to defer their taxes, but the taxes will be due at the end of the deferral. So, what can be done?
One Approach
One approach used is to take a percentage of the deferred tax dollars and create a family financial set aside (Farmers First Trust is not involved in the farmer’s trust creation or management) that will exist until the taxes are due. Securing dollars to grow, without the risk of access until the deferral period ends, provides a plan that can allow these dollars to multiply to meet the future tax obligation.
Another Approach
Another approach is provided by a life insurance policy to pay for the future tax obligation. Financing the premium for the farmer with a percentage of the deferred tax dollars, assures the farmer that funds will be available in the future to address the deferred taxes. This approach is called premium financed life insurance.
The planned provision of funds in the future removes the burden of future taxes on the children and allows the farmer’s financial team to grow the remaining dollars in investment vehicles of their choice knowing the payment for the tax obligation has been planned. With the premium financed, the farmer’s balance sheet is also healthy as the farmer moves towards the future.
Responsibility and Ownership
MDPT provides a process that preserves the value of the family farm. Deferring taxes, to allow a farmer to grow their capital, while simultaneously solving the financial burden of securing funds to pay for the tax obligations in the future, is extremely powerful. The extra capital in the hands of the farmer seller to grow as she/he determines places the decisions in their hands as they have the responsibility and the ownership of their future.
See the White Paper page at Farmers First Trust for a financial illustration of premium financed life insurance and how it can be a key to planning for the future.
Written by Michael Gustafson
Principal with Farmers First Trust
800-480-8090