Last month, we talked about land ownership and land titling issues. A common scenario in land ownership is that land is divided after the death of parents into equal, undivided interests for surviving heirs (usually siblings). Thus, the situation may arise (if the land is not sold) where cousins own land together after their parents pass away, leaving multiple tenants in common. Remember, each tenant in common has an unrestricted right to possess and access the property. They own a portion of the entire property. This creates a situation where all tenants would need to agree on important decisions. We all know that making decisions together gets harder the further down the family tree we get. This is a natural result.

What are the risks if there is no plan? For most families, the biggest risk is literally losing the farm. If continuing an existing farming operation is the goal, then the worst-case scenario happens when co-tenants cannot agree on the operation, maintenance and control of the land. If one tenant in common wants to sell the land, all the tenants in common must agree. If an agreement cannot be reached, there is a remedy available in Iowa for the tenant in common who wishes to terminate or destroy the tenancy. A tenant in common may file a petition to partition the land with the courts. The risk is that a court would order the land to be sold at auction.

Iowa’s ‘new’ law

A few years ago (in 2018), a new partition law was established in Iowa Code Ch. 651. The law establishes provisions for partitions of property in kind and property by sale. The procedures related to an action for partition have long existed in Iowa. However, the new law contains special provisions that apply where real estate defined as “heirs’ property” is being partitioned. The bill defines “heirs’ property” as real property held in tenancy in common, where there is no recorded agreement governing partition of the property, and where one or more co-tenants acquired title from a living or deceased relative. According to the bill’s author, in enacting this bill, the Iowa Legislature recognized that family farms often present special circumstances where noneconomic factors should be given fair consideration, in addition to simply ordering a procedure most likely to yield the highest sale price.

How to prevent lawsuits? Estate planning tools. Even with the protections set out for farm families in the Iowa law, the partition action is still a lawsuit — involving time, money and the court. It is always best to act before the issues above arise. One simple fix would be to record a right of first refusal or option agreement that would place restrictions on the sale of the farm ground in the event one heir wants to sell. A recorded agreement could “run with the land,” meaning that it would apply to transfers of that land for generations to come.

What about an entity for estate planning and preventing ownership disputes? The short answer is, of course this would work. … in the right situation. At the onset of the estate and succession planning process, one of the issues that should be discussed is whether a business entity can play a part in the overall plan. A secondary question to ask is if an entity is a viable way to accomplish estate planning goals, which entity should you use? A trust, a partnership, a “C” or “S” corporation, an LLC, an LLP, an FLP (Family Limited Partnership), etc.? As you might suspect, there is no “magic” or perfect entity.

While there is no one-size-fits-all entity, some farm families that are concerned with keeping the farm together and protecting the farm from a later partition action, choose to form a business entity, such as an LLC, with carefully drafted buy-sell agreements to protect the on-farm heir who is set to continue the farming operation. Drafting a good operating agreement is also the key to the success of this arrangement and the operation of the entity.

What about liability protection? One of the added benefits of the LLC or entity solution is liability protection for personal assets if done correctly. Among some of the liability concerns may be liability for the debts of other family members, accidents on the property or other lawsuits. Owning land with distant relatives may be harder to navigate because you aren’t as familiar with their individual financial situations or risk tolerance.

That being said, it is always a good idea to consult your insurance agent to determine what options are available to protect you as well. There is no way to completely avoid a lawsuit. You could always be sued, whether that suit has merit or not. Of course, before you make any of these decisions, you really need to consult your attorney and your tax adviser. There are some tax considerations to take into account, especially with the new “retired farmers” Iowa income tax provisions. What works for one family may not be the perfect solution for another.

Herbold-Swalwell is with Parker & Geadelmann PLLC. Email her at [email protected].