Marv and Sandy retired from farming and now rent out their 200 tillable acres to their neighbor, with whom they have a great relationship. Marv and Sandy are in their 80s and are contemplating transferring the land to their children, Gary, Larry and Mary. They are discussing whether to transfer the land to their children now or retain ownership until they pass away. This has gotten them thinking about some of the challenges their children could face owning the land as tenants in common. Now that Gary, Larry and Mary will be co-owners in the land, Marv and Sandy should discuss some of the following issues between themselves and with their children:
• Partition action. In Wisconsin, an individual owning an interest in real estate with others may file a partition action with the court. The year after Marv and Sandy pass away, Gary, Larry and Mary continue renting the land to the neighbor at the same rent. However, Gary wants to sell the land to receive his third of the proceeds.
Gary could file a partition action, and the judge would be required to attempt to “partition” the property into three equal properties. Each sibling would then own his or her third of the acreage individually. If the judge was unable to create three approximately equal properties from the 200 total acres, the judge would force a sheriff’s sale of the property. Marv and Sandy may cringe at the thought of this, as the land has been in the family for many generations, and they would like it to continue in the family.
One way to protect against this is for Marv and Sandy to contribute the land into a limited liability company and transfer the LLC interest to their children. With the real estate held in an LLC, an owner of the LLC may not proceed with a partition action. Instead, he or she must rely on the terms of the LLC’s operating agreement to sell their interest.
• Management disputes. Another issue to consider is that decision-making and management of the land becomes more complicated now that Gary, Larry and Mary are co-owners. Will all three have to negotiate and sign the lease with the tenant? Will the tenant write three separate checks — one to each sibling? Or will the tenant write one check to Mary, and she is responsible for dividing the rent?
What if Gary and Mary want to continue renting the land to the neighbor at the same rent, which may be below market, but Larry wants to receive the highest rent possible? Larry could make life difficult if he refuses to sign a lease.
An LLC can establish how decisions will be made and how disputes will be addressed. The operating agreement can provide that one member will be the “managing member” with authority to execute documents on behalf of the LLC, as long as that decision or document was approved pursuant to the terms of the operating agreement. The siblings would establish a bank account in the LLC’s name, and one sibling could have authority to execute checks on behalf of the LLC. The LLC helps provide how taxes will be paid, and how and when rent proceeds will be distributed.
• Transfer restrictions. A third concern with Gary, Larry and Mary owning land as tenants in common is that each is free to transfer his or her interest any way they want. Gary could sell his interest to a third party. If Mary passes away and transfers her interest to her husband, who remarries, they would now own a third interest in the real estate.
Assume that Gary has two kids, Larry has four, and Mary has three. Once the real estate transferred to Marv and Sandy’s grandchildren, there could be nine owners in the real estate. Maybe Gary, Larry, and Mary as siblings can get along well and continue ownership, but cousins may not have the same relationship.
The LLC operating agreement can establish transfer restrictions that govern how and to whom an owner can transfer his or her interest. Marv and Sandy could provide that spouses cannot become owners in the LLC, only descendants. Maybe Gary, Larry and Mary can only transfer ownership to one child each. Therefore, you can limit the total number of owners in the LLC. The transfer restrictions can also establish a procedure for purchasing an owner’s interest who wants to withdraw.
These are just a few of the challenges facing siblings who become co-owners in real estate. Marv and Sandy may realize that while Gary, Larry and Mary have a strong connection to the land, if no one in the family is farming the property, the grandchildren may not feel the same connection and may want to sell their interests. While land may have been in your family for generations, if no one in your family is continuing to farm the land, it can become difficult to control things from the grave.
During their discussions, Marv and Sandy should be mindful of these challenges and speak with people they trust to guide them through these decisions.
Knickelbein is an attorney at the ag law firm of Twohig, Rietbrock, Schneider and Halbach S.C. in Chilton. Call Knickelbein at 920-849-4999.