farm  Photo Credit: royal broilNot all small business owners wear slacks.  Instead, some opt for overalls or jeans and work boots and make their offices in barns and fields, tending livestock and crops.  Regardless of the uniform, every small business owner faces an uphill struggle in the scheduled federal estate tax increase.

The difference is that for farmers, the hill is steeper.  While every business and individual will feel the effect of the automatic spending cuts and tax increases to take effect in 2013, it’s small farmers who truly face a fiscal cliff.

While state measures like Maryland’s Family Farm Preservation Act have helped the ease the burden of the estate tax on family-owned farms, the federal estate tax rate is set to jump from 35 percent to 55 percent and the amount exempted from taxation will reduce from $5 million to $1 million.

One of the problems for small farmers is that their estates are valued highly – often over the pending $1 million threshold – because of the the land and equipment involved.  Despite a proverbial wealth of those physical assets, few farmers have sufficient liquid assets to afford the estate tax without selling off a substantial amount of property – an amount that cripples many a farm.

Maryland farmers have a degree of relief thanks to the aforementioned Family Farm Preservation Act, which reduces the estate tax rate while increasing the amount exempt from tax on property used for agriculture.  But that relief does not extend to the federal estate tax, which is already higher than state equivalents, or to the state inheritance tax (Maryland and New Jersey being the only states with both).

The federal government, in the right circumstance, offers some relief in the timing of estate tax payment for closely held businesses if the business comprises 35 percent of the total estate value. But even that delay, under IRC Section 6166, doesn’t avoid the inevitable.

Furthermore, there are problems facing small farmers not merely in the tax office but also in the courtroom.  

The ongoing Maryland lawsuit of Waterkeeper’s Alliance v. Hudson Farms & Perdue Chicken could shake the structure of the agribusiness industry to its core.  In that case, the plaintiff environmental group contends that a small family-owned farm that contracted to maintain chickens for Perdue has polluted waterways feeding into the Chesapeake Bay.

If the court finds in favor of the plaintiff’s contention that Perdue is ultimately liable for the alleged pollution, then every corporate giant atop the agricultural food chain and every small farmer contractor at the bottom will be affected by the legal precedent.

Such lawsuits one illustrate another problem for small farmers, once again not local to Maryland: asset protection.

A farmer’s assets personal assets – no matter how substantial – may be at risk of seizure in a lawsuit if they are not properly insulated.

Limited liability corporations and trusts are some of the most common and effective strategies for ensuring that a personal bank account is protected from a potential business blunder.  Unfortunately, small business owners in both slacks and overalls are often unaware of the risk involved in failing to plan ahead and protect their assets.

If you’re a small business owner and you haven’t already, you need to call a lawyer and make sure your ducks are in a row before the gift and estate tax increases hit in January.

Good luck and good hunting.

 

 

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