I told several stories last month at the Farm Futures Summit on how the ownership of farmland was a potential tripwire waiting to happen. Ownership is one of the more important parts of setting up a successful transfer, however, it’s often overlooked. In particular, owning farmland as joint tenancy or tenancy-in-common generates a lot of questions (and confusion) over which is best. Here is a recount of 5 stories I shared at the Summit for your consideration:
Ownership dictates, not your will
Two brothers owned 80 acres as joint tenants. Each of their Wills distributed their one-half of the farm to their respective spouse or children. However, when you own an asset as joint tenants (with full right of survivorship), your Will does not dictate the distribution as the ownership simply stays with the other joint owner. In this case, if something happened to one of them the remaining brother would own the entire farm. After catching this, we changed their ownership to tenants-in-common so their Wills distribute their one-half as they wish.
A high percentage of farmland is owned between husband and wife as joint tenants with full right of survivorship. This is simple and recommended by many estate planning advisors in order to avoid probate at the first death. All the assets transfer to the surviving spouse with an adjustment in basis (step-up), and the same assets receive a second adjustment as they transfer to the children at the second death. My grandparents had this plan but what tripped them up is one of the farms was in my grandfather’s name only. This required his Will and the probate process to distribute this farm at his death. The probate fees were not on just this one farm, but his entire estate. If this is your plan to avoid probate, be sure all your farms are in fact titled as advised.
As noted, joint tenants with full right of survivorship is simple, should not cause a probate at the first death, but also leaves the entire taxable estate to the surviving spouse. For most this is not a concern from an estate tax perspective since the current federal exemption is very high at $11.7 million per person ($23.4 million per married couple). However, this is due to sunset on January 1, 2026 to previous levels of $5 million per person (adjusted for inflation). Current tax proposals could lower this to as low as $3.5 million per person. This is why we could see more estate “rebalancing” where each spouse owns a relatively equal proportion of the farmland to take advantage of each of their estate tax exemptions. Or, they can own all the farmland together as tenants-in-common each owning an equal one-half of all the farmland.
There are other potential tripwires which can occur by leaving the surviving spouse all the farmland. There may not be an estate tax problem today, but what about in the future as the value in the farmland continues to appreciate or estate tax laws change. Also, now all the farmland is subject to the surviving spouses creditors such as second marriage, the nursing home, or lawsuit situations. Sometimes the surviving spouse is left with undue stress from owning all the assets and making the right decisions. These decisions can be influenced by greed, emotion, and fear. One story I told was of the surviving spouse who made a fear-based decision and gifted all the farmland to the kids because she was worried about the nursing home taking the farms one day. It turns out nursing home was never a concern and now the kids own low basis land that could have otherwise received a step-up in basis through their Mom’s estate.
Finally, there are many plans out there which transition the farmland from Mom and Dad owning it as joint tenants to the children owning it equally as tenants-in-common, share and share alike. I told the story of the family of 32 I worked with who each owned an undivided 1/32 in the farm. With undivided ownership in real estate, it technically only takes one to force a partition sale or make it difficult on the others. This is an extreme example but consider what impact these decisions could have between your children with rising land prices and cash rents. In absence of any other ownership structure hopefully the farm will stay together for your farming heirs to continue to farm.
The decision of joint tenancy or tenants-in-common depends on your specific situation and what the goals are in your estate plan. Consideration needs to be given to estate and income taxes, basis step-up, asset protection, and what the final distribution looks like to the next generation. Next time, I’ll take the topic of farmland ownership another step further and go into other types of ownership structures such as Trusts and LLC’s.
You can still view the 90 minute estate and farm transition workshop I gave virtually by visiting the registration page and use my discount code DOWNEY20.
Downey has been helping farmers and landowners for the last 21 years with their family farm transition, leasing strategies, finances, and general land consultation. He is the co-owner of Next Gen Ag Advocates and an associate of Farm Financial Strategies. Reach Mike at [email protected].