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Structure matters for inherited property

wutwhanfoto/getty images Gavel at the judicial office
DYNAMICS MATTER: When dealing with inheriting the farm balancing family dynamics with the need to maintain day-to-day operations requires planning. Consider options for your farm.
Legal Issues: What to do when you inherit the farm? Navigating family dynamics is key.

Every family has different dynamics, every farm has a different operation, and every legal situation involved is different. It is quite common for parents to leave each of their children an undivided, but equal, interest in the farmland they own upon their death.

With that background in mind, there are many considerations for children who inherit farmland to think about. They might want to own and operate the land themselves, rent out the land for an income stream during life, or even sell the land. Below is a discussion on how to navigate those issues for first-time landowners.

First, understand how the land is titled. As an inheritor of farmland, it is important to understand how you own it. You may own it as joint tenants with rights of survivorship, meaning the surviving joint tenant(s) inherits the portion owned by the other tenant(s) when they die.

The key words in this type of tenancy are “with right of survivorship.” Ownership by tenancy in common means that the co-tenants all own an undivided interest of the entire property. A tenancy in common lacks the survivorship component associated with the joint tenancy with right of survivorship. In other words, a tenant in common may sell, transfer, gift or will their undivided ownership interest to whoever they choose. It is quite common for parents to leave each of their children an undivided, but equal, interest in the farmland they own upon their death.

Siblings or more distant family members owning land together? Consider an entity. If there are multiple owners of the land, I would suggest having a family meeting as soon as possible and investigate all land ownership options, such as the formation of a legal entity. An entity offers legal protection for your personal assets, a “road map” for operations and options for members who want to exit the operation. I would also recommend contacting your insurance agent to discuss liability insurance options.

Choosing a legal entity. If you inherit a farm owned by multiple relatives or other individuals, I would strongly encourage you to investigate setting up an entity to own or operate the farm. Iowa law provides a structure for setting up business entities, such as a general partnership; a “C” or “S” corporation; and an LLC or LLP, or FLP (Family Limited Partnership), etc.

As you might suspect, there is no magic or one-size-fits-all entity. The most important benefit in using an entity in a family farming operation, especially if siblings are farming together or own land together, is the establishment of a “road-map” or operating agreement that addresses important topics such as buyouts, life events such as death and divorce, voting and dispute resolution.

Points to ponder on entity choice. In deciding the entity to choose, you will want to consider, first and foremost, who will make the decisions for the business on a day-to-day basis. Depending on family dynamics, this arrangement will be different for each family. In some families, there may be an “on-farm” heir who is the logical choice to pay ordinary expenses, such as property taxes; pay for and make changes to liability insurance coverage; coordinate the filing of taxes; talk with farm tenants or  custom farmers; or purchase inputs.

You may also want to address tax consequences with your farm accountant. Your family may also want to look into other tools that may be available to clearly define the relationship of the parties and outline what happens in the future. Tools such as buy-sell agreements, option agreements or rights of first refusal, machinery sharing agreements will help ensure that you or your heirs are able to purchase or inherit the tools, equipment, or other assets they need to carry on the operation.

Rely on your team of trusted advisers. If you don’t have one, build one. Relying on your trusted team of experts is the best way to successfully navigate first-time land ownership in what could be an emotionally trying time. Remember, there is no one-size-fits-all plan. Ask your trusted friends, family, or other professional advisers for referrals if you are in the process of building a team.

In my experience, communication is key to developing a plan that will actually be implemented successfully. For a great read on what to do when you inherit a farm, take a look at Iowa State University's “Getting Started in Farming: Inheriting a Farm,” available at bit.ly/isuinheritfarm

Above all, relationships are most important, especially with parents, siblings, spouses, children and grandchildren involved. In my experience, communication is key to developing a personalized plan when you inherit farmland.

Herbold-Swalwell is with Parker and Geadelmann, P.L.L.C. You can reach her at
[email protected].

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