The need for estate planning for agricultural families has never been more evident than it is today. The average age of all farm producers in the United States has continually increased and reached 57.5 years old in 2017.[1] While an aging producer population presents many estate planning opportunities, they often neglect planning for social security benefits. Some farmers choose to sign up for social security before their full retirement age out of the fear that it will not be around for the remainder of their lifetime. However, this decision can be costly because these individuals are subject to an earnings test. While individuals may begin receiving social security benefits as early as age 62, the full retirement age for producers born from 1943 to 1954 is 66, and it is 67 for those born after 1960.[2]
The Social Security Administration will deduct $1 for every $2 earned above the annual limit for individuals who begin receiving social security benefits before their full retirement age. The annual limit is $18,960 in 2021. For those who wait to receive benefits until they reach full retirement age, the deduction is $1 for every $3 earned over $50,520 in 2021. The Social Security Administration will only count earnings up to the month before the individual reaches full retirement age, not for the entire year. As soon as the farmer reaches full retirement age, the Social Security Administration will stop reducing benefits, regardless of how much the farmer earns.[3]
For example, a producer who earns $30,000 in 2021 would be $11,040 above the 2021 annual allowance. The Social Security Administration will reduce his or her benefits by $5,520 in 2021. However, suppose the same producer waits to receive social security benefits until reaching full retirement age. In that case, the reduction, if any, will likely be smaller because the Social Security Administration will only look at income the producer earned before reaching full retirement age.
Farmers can avoid reductions to their benefits by waiting to receive them until after reaching full retirement age or utilizing estate planning techniques to increase their passive income. Passive income does not count toward the producer’s annual limit because it is not wages or profit from being self-employed.[4] Rental activities are considered passive income, regardless of whether the producer remains active in the farming operation.[5]
Producers who own the farmland and want to pass the operation down to the next generation can increase their passive income by renting the farm ground to their successor. The rental income will not count towards the producer’s annual limit but allows producers to maintain the same income level without affecting his or her social security benefits. Similarly, setting up an entity may be a viable option for producers who are not ready to step back from farming. The producer could create an LLC, transfer all farming assets into it, except the farm ground, and rent the land to the LLC. Any wages or distributions the producer receives from the LLC count toward the annual limit, but the rental income from the farm ground would not.
Please feel free to reach out to the attorneys at Jacobsen Orr if you have any questions about the earnings test and how to utilize estate planning tools to avoid it.
[1] https://www.nass.usda.gov/Publications/Highlights/2019/2017Census_Farm_Producers.pdf
[2] https://www.ssa.gov/benefits/retirement/learn.html#h1.
[3] https://www.ssa.gov/benefits/retirement/planner/whileworking.html.
[4] https://www.ssa.gov/benefits/retirement/planner/annuities.html.
[5] https://www.irs.gov/publications/p925.