As a guideline, retirement age parents with less than $400,000 of assets and social security as their primary retirement income are probably in a "marginally adequate to inadequate" situation, even if they have no debt. They need to maintain their net worth for retirement income and security.
The basis for this guideline is that a reasonable real (inflation adjusted) rate of return on farm net worth is about 3 percent per year. Therefore, a $400,000 net worth would yield an income of $12,000 per year. This $12,000 would be needed to supplement social security benefits so that the parents would have enough retirement income to support a modest lifestyle. A net worth below $400,000 or so in a farming operation can barely support one family, much less two.
Things can really become tight when the parents are no longer able to do the physical work but need retirement income from the farm, and the children have to hire someone to do the work previously done by the parents. The farm that was large enough to support the parents has trouble supporting the parents in retirement, children on the farm, debt payments, and the employee(s) hired to do the work formerly done by the parents.
Federal estate taxes are not a major concern for this size estate. However, there will likely be probate costs and state estate taxes. The parents usually can safely transfer assets to the children only by having the children purchase them. Frequently the children do not have money to buy the parents' assets because they are trying to raise a family on the limited income available to them. The parents really are not in a financial position to make substantial gifts to the children.
This may cause great distress to children wanting to farm. A net worth below $400,000 or so frequently is evidence of a marginally profitable farming operation for children wanting to farm full-time. It is even more difficult when the parents need $15,000 to $20,000 per year or more from their investment to live on.
Parents with between $400,000 and $800,000 of net worth may have adequate resources for their own retirement income and security needs. However, they should still be cautious about transferring large amounts of property without getting paid for it-especially in pre-retirement years.
If they have substantial savings and investments or retirement income in addition to social security, they may feel more comfortable making gift-type transfers. However, if their primary sources of income are social security and the farm business, gift-type transfers become more questionable.
If the parents' net worth approaches $600,000, they also have a potential federal estate tax problem. Couples with a net worth in that range usually should have wills that do not leave everything to the surviving spouse. That type of will causes the surviving spouse's net worth to approach or exceed $600,000 or more. Estate settlement costs will take nearly 50% of every dollar above $600,000 of net worth in a single person's estate. A simple change of wills while both parents are alive can solve much of the estate tax problem. For more details see Bulletin 595, Estate Planning Considerations for Ohio Families.
Parents with more than $800,000 in assets and little or no debt usually may begin the transfer process whenever they desire. A widow or widower with a net worth above $600,000 should consider gifts to try to protect the estate from potentially large federal estate tax liabilities.
However, even in this "adequate to very adequate" situation, parents must carefully plan transfers. Substantial amounts of debt, particularly non-mortgage debt, may also limit the advisability of transfers. Prospective farming heirs should prove their management ability and aspirations before large amounts of property are transferred to them. Parents also should try to treat non-farm heirs fairly.