Using Trusts Farmland Ownership Agriculture’s Future…Manage it Today National Farm Business Management Conference Michael Duffy, Iowa State University Ed Cox, Drake University Ag. Law Center June 10, 2013 Outline • • • • Acknowledgements Objective of the study Iowa trusts Future work Acknowledgements • Funding – Leopold Center at ISU – College of Agriculture & Life Sciences at ISU – Iowa Chapter of Am. Society of Farm Managers and Rural Appraisers • Information & their time – Iowa Trust Association – Iowa farmland owners Objectives • To determine the extent and nature of farmland ownership by trusts in Iowa • Determine the effects of public policy on the expansion of ownership by trusts. • Determine the legal obligations of, and remedies available for, trust parties in relation to the sustainability of trust assets and develop potential state policies that help ensure compliance with fiduciary duties relating to sustainable land management. Methodology • Internet survey of members of Iowa Trust Association; – 29 responses; unsure of exact representation for the survey; 25 had trusts that included Iowa farmland; • Added questions to the Iowa Farmland Ownership survey; every 5 year survey of Iowa farmland ownership by ISU; telephone survey using 40 acre tract as unit of sample; most answers are as a percent of farmland not people Iowa Farmland Trusts Percent of Iowa Farmland in a Trust by Year 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1982 1992 2002 2007 2012 Average Ranking for Reason People Place Farmland into a Trust, 1 Not Important to 5 Very Imporant 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Provide benefits Protecting assets Protecting assets Avoidance of for a charity from creditors with spendthrift capital gains clauses taxes Prevent children from selling land Trustee survey Avoidance of probate Planning for death or incapacitation Estate tax implications Provide income for surviving spouse Distribution of Iowa Farmland by Use of Trusts, 2012 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Already in a trust May go into a trust Distribution of Iowa Farmland in a Trust by Type of Trust, 2012 60% 50% 40% 30% 20% 10% 0% Revocable Irrevocable Other/DK Distribution of Iowa Farmland in an Revocable Trust Based on Changes After Death of Establisher, 2012 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Become irrevocable Stay revocable DK Distribution of Iowa Farmland in a Trust Based on Where the Trust was Established, 2012 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Arizona California Illinois Iowa Missouri South Dakota Other Number of Owners/Beneficiaries for the Trust 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 2-5 Trustees Owners 6 - 10 Percent of Farmland in Trusts by Number of Owners 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Single Couple Two Three Owner survey Four >4 Distribution of Farmland by Gender and Trust Status 60% 50% 40% 30% 20% 10% 0% Land in trusts All IA farmland Male Female Distribution of Farmland in Trust by Age of Owner and Gender 40% 35% 30% 25% 20% 15% 10% 5% 0% < 50 50 - 60 60 - 70 Female Male 70 - 80 Total > 80 Distribution of Farmland in Trust Based on Primary Reason for Owning the Land 80% 70% 60% 50% 40% 30% 20% 10% 0% Women Men Current income Long-term investment Total Sentimental Percentage of Iowa Farmland in a Trust Based on Who is the Trustee, 2012 70% 60% 50% 40% 30% 20% 10% 0% Land owner Family Member Attorney Bank Someone Else/DK Distribution of Iowa Farmland in a Trust Based on Trustee’s Involvement Farmland Operation, 2012 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Farming the Land Acting as the Farm Manager Delegating the Farm Management to Someone Else Don't Know Percentage of Iowa Farmland in a Trust Based on Successor Trustee, 2012 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Family Member Attorney Bank Someone Else Don't Know Distribution of Iowa Farmland in a Trust Based on Management Specification Attributes of the Trust, 2012 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes Requires professional farm manager No Don't Know Specifies how to select who will manage farm Perecent of Trusts by Factor to Determine Life of Trust 60% 50% 40% 30% 20% 10% 0% Surviving spouse's life Children's lives Multiple generations Trustee survey Set number of years Length of Time for Farmland in Trusts 35% 30% 25% 20% 15% 10% 5% 0% Lifetime of originator Lifetime of beneficiary Lifetime of a class of beneficiaries Owner survey More than a generation DK Trust Document Provides Provisions for Selecting Tenant 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes No Trustees Owners DK Average Importance of Characteristic in Selecting Tenant for Rented Farmland in a Trust, 1 least important to 5 most important 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Related family member Know personally Young farmer getting started Owner survey Be a good steward of the land Percent of Trusts by Type of Tenancy Arrangement 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Cash rent Crop share Custom Trustees Owners Owner operated Conservation programs Use of Professional Farm Manager 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes No Trustees Owners Occasionally Trustee Average Rating for Use of Information Sources, 1 to 5 Scale 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Farm magazines Trade publications Government publications Internet Trustee survey Tenants Extension service Experience Preferred Source of Information for Farmland Owners in a Trust 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Mail TV/Radio Newspaper Owner survey Internet Face to face Other Are There Provisions for Soil Conservation in the Trusts? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes No Trustees Owners DK/RF Should Soil Conservation or Sustainable Agriculture be Factors in Managing Farmland in a Trust? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes No Trustee Survey Distribution of Iowa Farmland Based on Impact of Greatly Reducing or Eliminating Capital Gains Tax, 2012 80% 70% 60% 50% 40% 30% 20% 10% 0% More Likely to Sell ALL Farmland More Likely to Sell SOME Farmland Have No Effect on Selling Farmland RF/DK Distribution of Iowa Farmland Based on Factors Most Likely to Cause Sale of Some or All Farmland, 2012 30% 25% 20% 15% 10% 5% 0% Lower Capital Gains Tax High Selling Price Per Acre Your Retirement from Farming Something Else RF Don't Know Distribution of Iowa Farmland by Anticipated Method for Distributing Farmland, 2012 60% 50% 40% 30% 20% 10% 0% Will to family Give to family 1982 Sell to family 1992 2002 Sell to others 2007 2012 Put in trust Other Distribution of Iowa Farmland that may go into a Trust Based on the Reason for Considering a Trust, 2012 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Potential tax savings Help keep farmland in Limit family beneficiaries'control over assets Relieve burden on others Other reason Observations • Trustees tend to represent multiple owner trusts whereas the majority of farmland reported to be in trusts was single owner or owned by a couple • Tax avoidance and estate planning are strong reasons for using a trust but limiting children’s ability to sell or change is also noted Observations • Most trusts were established in Iowa and there are primarily elderly and female owners • Most trusts are set for one generation • The increasing use of trusts appears to be slowing • For most landowners taxes are not the major consideration in whether or not to keep their farmland Observations • Conservation and sustainable agriculture practices are almost totally absent from trusts • Trustees believe this is a duty • This is an area for Extension and further research as the use of trusts continues to grow