Estate Plan Edge: Here are four ways to pass down land and tie your children together, and none of them are good ideas.
When your children were young, you taught them to share. It’s a great concept for toys and cupcakes. But when your children have their own families, careers and retirement plans, don’t make them share your farm.
In theory it sounds great: all of your children co-owning the family farm, receiving his or her share of the rent, enjoying family reunions by the pond and meeting every Christmas to discuss farm finances. Later the grandchildren carry on the legacy, and so on.
You’ve heard the phrase that comes with the shrugged shoulders: “It seemed like a good idea at the time.”
The reality is that any siblings, and even more so cousins, will differ in their relationship to the family farm. Some will have deep sentimental attachment, some will appreciate the steady rental income, some will want to farm the land, and some will just see dollar signs.
There are a variety of ways you might, but shouldn’t, tie these people together:
The simple one. The will or trust says, “Give my land equally to my five children as tenants in common.” Each child becomes owner of an undivided one-fifth of all. No one has any authority over the others to manage it. By law, majority does not rule. Unless they agree, no one has legal power to decide for the group.
You might think this makes it hard to sell the farm. Nope. Instead, “worst person wins.” Unless there is consensus, year after year, for managing the farm, any one of the five has absolute right to force the sale of the entire farm. It starts as a lawsuit to partition the property into separate tracts, but unless the judge can literally split it into five identical tracts, which is impossible, the court will order the property auctioned and the five owners split the money. If some of the five want to keep the property, they will have to bid for it on the open market.
There go the family reunions. And your legacy.
The partnership. Another co-ownership arrangement is to put your real estate into a partnership and give each child 20% of the partnership. There is a lot of similarity here to the previous example, but with a twist: Every one of the partners has the authority to make a decision for the partnership, and all the partners will be bound by it! The first partner who realizes that rents the property to his son-in-law at a cheap rate, and the partnership is bound to that lease.
It is easy to see why an unhappy child withdraws. But she has no way to force the others to buy her out, and no legal right to take any of the land. If she can’t negotiate an exit agreement, the family is headed for court.
The corporate stock gift. How about a corporation? Mom and Dad formed a corporation for the income tax benefits years ago. They bought land in the corporation. They give each child 20% of the corporate stock. As shareholders, they don’t have any authority to act for the group. Instead, they have to elect officers of the corporation to act for them. This forces a bit of organization to the chaos. Majority can effectively rule. If anyone doesn’t like the direction things are going, that person has the right to sell their shares to a third party.
But selling out comes at a high price: The stock value is very low. Some of this is because of the tax implications of appreciated property held inside of a corporation, and the ability of a majority to manipulate the tax liabilities from year to year. The unhappy sibling who wants out will have to take a lot less money than what one-fifth of the land is really worth.
The LLC. A limited liability company is another form of shared ownership. LLCs can be taxed like a partnership or like a corporation. Majority rule is possible, but the membership agreement is all-important. This organization still provides fertile soil for hard feelings based on different personal and family goals and needs.
Any of these co-ownership arrangements get dramatically worse as they pass into another generation. If you are a co-owner in one of these situations, get the players together and find a way to part on good terms.
Planning your estate? Don’t condemn your children to co-ownership of real estate. Be more creative and find ways to give something to each that will appeal to their needs and wants, while explicitly protecting any successor-farmers in the family.
Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com. The opinions of this writer are not necessarily those of Farm Progress/Informa.
