July 20, 2005

Many farmers are weighing their options when it comes to receiving payments from the federal tobacco buyout in a lump sum or receiving them over a 10-year span. Before making the decision, it is important for producers to obtain sound financial advice.

The tobacco buyout legislation provides for both producers, who receive the $3 per pound payment, and quota owners, who receive the $7 per pound payment, to receive a lump-sum payment beginning with the fiscal year 2006 payment.

The decision to take a lump-sum payment involves several economic and personal considerations, said David Heisterberg, director of the University of Kentucky College of Agriculture’s Farm Management Program.

In deciding whether to take a lump-sum payment, growers and owners need to be aware of the procedure for setting up a lump-sum option, tax implications and financial return, and advantages or disadvantages of a lump-sum payment.

Financial institutions always will discount the lump-sum offer by a certain percentage. Recipients that go this route will receive less money up front than if they had taken payments over the 10-year period.

The lump sum may be a useful source of financial liquidity, Heisterberg said. It may simplify estate planning or making gifts to others. A lump sum may enable the recipient to do things that could not be done otherwise. On the other hand, wasteful spending may more easily occur with a lump sum than if it was received as installments spread over nine years.

The income tax consequence is a major consideration that individuals should discuss thoroughly with their tax preparer and other financial advisers as soon as possible to make an informed decision about whether to take a lump-sum, he said. The advisability and advantages or disadvantages for doing so will vary with each individual.

The lump-sum option requires the quota holder or tobacco producer to enter into an agreement with a private party, such as a bank, to receive the payment from them (not the government agency issuing the buyout payments) in return for the rights to future payments. This is also referred to as "successor-in-interest contract." 

In this process, a buyout recipient transfers all rights from the buyout contract to the private party by executing a successor-in-interest contract with the private party and the Commodity Credit Corporation (CCC). These contract forms will be available from the local U.S. Department of Agriculture Farm Service Agency and will explain how to transfer buyout payments from the CCC to another party.

Signing up for a lump-sum payment is not a one-time deal. A producer or quota owner could wait one or more years and then choose to receive a lump-sum payment on whatever number of payments remains. The deadline to execute a successor-in-interest contract is Nov. 1 of each year.

The only requirement is that the lump-sum payment must be on 100 percent of the remaining payments. Therefore, there should be a great deal of flexibility for many people to take a lump-sum payment amount that will fit their individual situation, Heisterberg said.


Editor: Laura Skillman 270-365-7541 ext. 278

Contact: David Heisterberg, 270-886-5281