When working with farmers on estate planning and succession planning, it is common to hear something like, “I never want my land sold for a housing development.” If this is truly a desire to be met, an estate plan can be designed to accomplish this — at least for a long time after death. There are several different methods that can be used to protect land for future generations.
The first possibility is using a trust. In this scenario, land is transferred to a trust. The trust states that after the owner’s death, the trustee may farm the land or lease the land to a third party, but may not sell the land.
The land may be held in trust for one, two or three generations. While the land is held in trust, the beneficiaries of the trust, usually descendants of the deceased, will receive rent from the land.
This strategy provides a long-term source of income for future generations, while protecting the land from being taken out of agriculture.
Charity as contingent beneficiary
So, how do we know that 10 years after the landowner dies, that the trustee and beneficiaries don’t conspire to sell the land? One safeguard that can be installed is to involve a charity as a contingent beneficiary.
For example, the trust can say that the land cannot be sold for the next two generations; and if it is sold, all proceeds go to a specific charity. The charity can then be put on notice that it is a potential beneficiary.
The beneficiaries are put into a position that keeping the land and enjoying annual rent is a much better scenario than selling the land.
An agricultural easement is another option. This strategy involves the landowner donating or selling the development rights of the land to a land trust or government entity.
The easement is permanent, so the landowner can be assured that his or her land will stay in agriculture, even if it transfers out of the family.
The agricultural easement is different than the trust strategy because it does allow the land to be sold by the family — just not for a housing or commercial development.
Easement reduces land value
Another benefit of an agricultural easement is that it will reduce the value of the land. The fair market value of farmland includes the value for farming and value for other uses, such as development.
If the development use is given away permanently, such as with an agricultural easement, the value of the land becomes the agricultural value, which is less than the fair market value. An agricultural easement may reduce the value of the land by 25% or more. This can be important for landowners facing estate taxes.
By enacting an agricultural easement, the landowner can reduce the value of the land in his or her estate by 25% or more, which may save significant estate taxes for the heirs and beneficiaries. Additionally, the value of a donated agricultural easement can be deducted from the landowner’s income taxes.
Make decision thoughtfully
When considering these strategies, the landowner must understand that these actions cannot be undone by the heirs and beneficiaries. These are permanent solutions that will affect many future generations. If the landowner wants to leave some flexibility for the heirs and beneficiaries, he or she may want to look to other options that are not quite as strict.
Protecting farmland is a legitimate goal with estate and succession plans. There are tools available to landowners to achieve these goals. The primary decision for the landowner is deciding how strict the plan is, versus how much flexibility is left for the heirs. If your goal is protecting your farmland after your death, consult an attorney who can incorporate your wishes into a plan using a trust, agricultural easement or one of many other available estate planning strategies.