Farmers turn to advisers to cash in, keep land

* Despite skyrocketing land prices, farmers aren't selling

* Many facing huge estate tax problems

* Advisers helping them to keep land in the family

By Jessica Toonkel

Nov 25 (Reuters) - In sleepy White Sulphur Springs, Montana, farms and ranches fetched just hundreds of thousands of dollars five years ago. Now they're selling for millions.

It's a situation playing out across America's heartland, where the price of farmland has skyrocketed to a three-decade high. But not all farmers are cashing out. Instead, they are turning to their financial advisers for new ideas about how to generate income and avoid huge estate taxes on their increasingly valuable land.

Ellen and George Berg have been approached 10 times in recent years by buyers interested in their 5,000-acre Montana cattle ranch nestled along the Smith River.

Each time, Berg and her husband, whose family has raised cattle since 1946, have responded with a firm, "No".

"We want to keep it in our family and that means more to us than the money," said 59-year-old Ellen Berg.

The Bergs say they eventually want to leave the ranch to their son Sam, 25, who helps raise the cattle and lives in a log house overlooking two snow-capped mountain ranges.

The couple declined to reveal the assessed value of their property but based on sales of nearby ranches for upwards of $1,000 per acre, unless they take action, their son could be hit with a monster estate tax bill.

The federal estate tax exemption of $5 million ($10 million for couples), is scheduled to end at the end of 2012 and drop to $1 million.

A farm that may have been worth $3 million six years ago might now be valued at $6 million. If the farmer dies after 2012 and the estate tax exemption is lowered to $1 million, the heirs could face a federal tax bill of more than $1 million.

Now the federal tax bill would closer to $350,000. And that's just for the property. Add in equipment and the value of the farmer's life insurance policy and the bill could be much higher.

"Farmers may not have had an estate tax problem a few years ago, (but) they could have one now," said Shane Prill, a financial adviser with Raymond James Financial Services Inc said.

While Republican presidential candidates are pushing to get rid of the estate tax altogether, financial advisers are telling their farmer clients to put plans in place to help heirs avoid a massive hit in taxes.

SOARING PRICES

The price of U.S. farmland is at its highest level since the 1970s and is up 25 percent in some Midwestern and Western states just in the third quarter.

Driving the price increases: wealthy investors searching for returns at a time when other markets are volatile. They see farmland as a better bet for returns because of rising food prices, projected crop demand and lucrative land rents.

Amid this environment, navigating estate tax issues is a priority for farmers with heirs. They have increasingly contacted their financial advisers for help on doing everything possible to keep the land in their families.

"This is about family and is very emotional for them," said Ron Carson, founder and chief executive of Carson Wealth Management Group, an Omaha, Nebraska-based financial advisory firm that has several farming clients.

One way to avoid the price tag, advisers say: Give the farm away slowly. Many advisers, like Carson are helping clients set up LLCs, or Limited Liability Companies, which allow them to gift units of the land to their children during their lifetimes and receive a valuation discount, thus reducing their taxes.

Irrevocable life insurance trusts, which allow heirs to use the life insurance upon their parents deaths to pay for the estate taxes, also are increasingly popular.

The Bergs, for instance, are working with Chad Lippert, a financial consultant with D.A. Davidson & Co. to set up an LLC to start gifting land to their son.

THE RENTAL OPTION

Many farmers without heirs have turned to their advisers with another issue: Figuring out how they can stay on the farm and derive an income from the land once they can no longer do farmwork themselves.

With income-generating investments like money market funds, bank CDs and even Treasuries yielding close to nothing, renting can be a lucrative alternative for retiring farmers.

A 280-acre soybean farm in Kansas that Prill bought 12 years ago for $700 an acre fetched $40 an acre in rent. Now the property is worth more than double and could rent for $60 an acre, a 50 percent increase.

Rents don't appreciate at the same pace as the value of the land because the costs of equipment and materials also have risen, Prill said.

"If you get a 4 percent yield from rent, that's a lot better than what you can get on Treasuries," said Holmes Pettey, a Clarksdale, Mississippi, Raymond James adviser.

But getting that premium can be an emotional challenge for some farmers, who view their renters as part of the family.

Diane Morgan's mother, like many farmer widows, has rented her property out to another farmer since the death of her husband in 1997. That farmer and his son often do odd jobs for the 81-year old widow and check on her regularly, said Morgan, a Dayton, Ohio-based Raymond James financial adviser, who grew up on the farm and now has many farmer clients.

"It's not your typical renter/rentee relationship," Morgan said. "It's much closer."

For many advisers, the first challenge is convincing farmers to raise the rent.

A few months ago, after watching rents continue to rise and after agonizing with her daughter about what to do, she raised the rent for the first time in 10 years, Morgan said. Even, then, she raised the rent by less than 20 percent, far less than the going rate.

Still some advisers are getting calls from farmers, particularly younger ones, asking what they need to do to sell their farms, advisers said.

Even Ellen Berg occasionally daydreams about cashing out now that their property is so valuable.

"When it's 20 below zero and I am out there calving for hours, I think about (selling)," she said. "But we won't do it. This is our life."