As a farm estate planner, I always like to see clients take the necessary steps in their plan to preserve assets from the unknowns. Although unknowns can come in several forms, probably the most deadly is a lawsuit that obtains a large judgment against a farming operation.

It is no big secret that personal injury law is big business. Just sit down and watch a little television at night and I’m sure you’ll see advertisements from several personal injury attorneys.

In addition, we live in a litigious society, where a certain percentage of the general population has no qualms about playing the court system like the lottery.

There is a disturbing trend that I see with my farm estate clients and that is the lack of protection of their assets. It amazes me how many clients I meet that are worth millions of dollars, yet have no liability protection outside of whatever their insurance coverage is.

What is even more troubling is that many clients do not have a level of insurance that fully covers their net worth. 

Although there are several forms of corporate entities that offer liability protection, the Limited Liability Company (LLC) seems to make the most sense for farming operations. They are easy to set up, easy to maintain, and offer similar liability protection as a corporation. Not only does the LLC give us tools to use in estate planning, it is an excellent entity to provide asset protection. However, because legal entities can be taxed differently, it is always wise to consult with your tax preparer prior to establishing a corporate farming entity. 
Here are a few things to think about as to whether or not your farming operation and estate plan is adequately protected:

•Ownership: Ask yourself who owns the farm assets. If assets are owned by individuals, such as a husband and wife, you are exposing those assets to whatever liability you personally incur. Say for example you injure or kill someone by simply being at fault in an automobile accident. Generally all your assets, including farm assets, are at risk even if the farm assets had nothing to do with the accident you caused. Having an LLC hold farm assets can offer protection from liability caused by your personal acts or omissions. 
 
•Insurance: There are two dangers in relying on insurance to save the day. First, remember that a lawsuit verdict could surpass your coverage and reach into farm assets to satisfy the verdict. Second, remember that the insurance company will be litigating the lawsuit on your behalf. So, you’ll be in the back of the bus with the insurance company driving. Not the situation most of us would feel very comfortable in.

•Dangers from farming: Remember that farming is the second most dangerous occupation in this country. Factor in that farm machinery keeps getting bigger and drivers seem oblivious to farm machinery now days (at least in my neck of the woods), the chances of vehicle/machinery accidents keep growing. Agritoursim, animals, employee injuries, etc, all increase the chances of lawsuits.     

•Deep pockets: Most farm operations, due to escalating land prices alone, are not considered poor by any means. Rest assured that any accident, injury, or death will attract the full attention of personal injury attorneys.

•Semi-trucks: More and more farms have them, and these alone add a ton of liability exposure. Often times, it is wise to set up an LLC that owns the semi trucks and trailers just to keep these liability-heavy assets separate from other farm assets.

You can see that running a modern farming operation without any corporate shield is probably not a good idea. Most times, it is wise to have a corporate entity established that conducts the farming operations (the “operating entity”), and one or more other corporate entities that holds 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. A little more effort will be needed from a bookkeeping standpoint when having multiple corporate farm entities, but the benefit of liability protection will far outweigh the drawbacks.

John J. Schwarz, II, is a farmer and agricultural law attorney and farm estate planner in Steuben County, Ind. He can be reached at 260-665-9779 or by e-mail at jschwarz@cresslaw.com

These articles are for general informational purposes only. If you have a specific legal question, you should consult an attorney. The views and opinions expressed in this column are those of the author and not necessarily those of Farm World.