At the upcoming estate planning seminar that I will be speaking at on Feb. 21 at 6 p.m., in Kendallville, Ind., part of my presentation will be the benefits of setting your farm up as a legal entity. If you plan on attending, space is limited, so please call 260-351-4440 to RSVP.

Over the years, I have always been perplexed as to why farmers continue to operate a farming entity as a sole proprietor. With land prices, machinery, and other assets rising in value, I am even more perplexed why farmers continue to live their lives, often times being worth millions of dollars, without any of the protections that a legal entity provides.  

Yes, we all (hopefully) have insurance. But what good does a million or two million dollar policy do for a person if they are worth far more than that, and end up being sued for an amount above and beyond policy limits? Trust me, the “guys on TV”, as I refer them, won’t have any qualms about suing above and beyond an insurance limit.

Stop for a moment and think to yourself how many other businesses in various fields operate as just a sole proprietor. Drive through your local town and you’ll see banks, gas stations, construction companies, you name it, all set up as legal entities.  

I ask clients all the time if they build a barn for $100,000, how much would they insure it for? The answer is always $100,000. That way, if the barn is destroyed, they can rebuild the same barn. However, I routinely have clients come to me that are worth millions, and have a $500,000 or 1 million dollar liability policy. Why on earth would you not insure your entire net worth? The answer, as we all know, is cost. The higher the policy, the more the premium, and multi-million dollar policies are expensive.

For those who only rely on an insurance policy to save the day, don’t forget that insurance is not bullet proof. What happens if your insurer denies the claim? In addition, if you find yourself in a lawsuit, with the insurance company providing the legal defense, you’re going to be in the back of the bus while the insurance company drives.

Over and over, I tell clients that setting up their farm in the right legal entity can provide a lot of cheap insurance. Transferring real estate from personal ownership into an corporate entity, such as an LLC, is an excellent way to obtain an additional level of insurance. If your current insurance liability does not provide total coverage (meaning your coverage is equal to or greater than your net worth), having asset protection by way of a legal entity may help offset any lack of insurance coverage. 

Many farmers have an entity that conducts the farming operations (the “operating entity”), and one or more other entities that hold the assets (the “holding entities”). The operating entity then leases the assets from the holding entities.  Under this structure, farm assets are then separated from farm activities, as well as personal activities. That way, farm real estate and personal assets are generally protected from lawsuits arising from the farming activities 

Another benefit of a legal entity is that even if a creditor gets a judgment against a member or shareholder, the creditor normally is not allowed to step into the shoes of the member. The creditor does not get the right to vote with the member’s membership interest. Rather, the creditor obtains a “charging order”, which allows the creditor to only receive distributions, if any are made.

In addition, having the farm set up as a legal entity greatly assists in estate planning. Want to gift part of the farm, but not give up total control or income? Being able to gift shares, and thus partial interests in the legal entity, allows for a gradual transition from one income to the next.

There are many benefits to farming as a legal entity, and most people will be surprised to learn that setting their farm up as a legal entity is easier than they may think. I’ll cover the above, as well as other benefits of setting the farm up as a legal entity, at the Feb. 21 seminar. I hope to see you there.