Here’s the scenario: Mom and Dad die leaving the family farm to their children in undivided shares. Dad had retired so the tenant keeps farming land. All the children left the farm to pursue careers in big cities far away. Everything has been going smoothly with the farm. The children, now in their sixties, have a nostalgic view of the family farm. They get along because they continue to operate the farm like Dad did. But one day one of the children wakes up and realizes, “We are getting older, what will happen when my brother dies? I don’t want to deal with his kids!”
Are you prepared for a creditor forcing the sale of your land to pay for your nephew’s debts? If you own land as tenants in common, you are a partner with the other owners. Your partnership will come to an end. If you haven’t planned for its end, the chance of it ending badly are greatly increased.
Where do you begin?
First, you need to understand the issues. Then you can begin to come up with a workable plan while everyone is still getting along. Here are some issues to address:
Peace in the Family
Money is important, but enduring peace in a family is more precious. By planning ahead, most disagreements and disputes can be settled amicably.
Control of Who Can Own the Farm
As ownership spreads to the next generations, the chance that a share of the farm will be sold to a third party increases. Your niece might want to raise some quick cash and sell her interest. A nephew’s interest might be attached by creditors. If you don’t agree to limit who can own the farm, you might find yourself dealing with an unwanted a new “partner.” Limited liability companies and rights of first refusal can be used to control who can own and control the farm.
Since real estate is an easy asset to find, it is important to reduce the exposure of liability to the land. Partnerships generally offer no protection from a partner’s creditors.
Nature of the Land
If your land is near a major metropolitan area, it may be ripe for commercial development. If so, how will the decisions be made to develop it. What if some want to keep the old farm intact?
It is easier for three people to agree than it is for nine or more. There is also the practical consideration of obtaining every owner’s signature on a sales agreement, farm lease, etc. You need to decide how decisions are to be made and who can make them. Below is a partial list of management decisions.
- Choose a manager
- Negotiate sales of land
- Enter into sales agreements
- Negotiate farm leases (if crop-share leases, then authority to sell crops.)
- Hire professionals (accountants, attorneys, realtors, consultants, etc.)
- Authority to write checks and pay expenses.
- Negotiate and grant easements
- Vote stock shares
- Lease water rights
- Sell water rights
- Monitor farming operations
- Safeguard documents
- Negotiate oil and gas leases
- File tax returns
Ownership by tenants in common only works if all the owners can be in agreement. But what if a great nephew wants to park his mobile home next to the prettiest pond in the pasture? He can. What if someone (or their creditor) wants to force the sale of the land? They can.
Since it is usually best to manage, develop or sell land in a coordinated and planned manner, it is prudent to minimize the consequences of these scenarios. This can be obtained through the use of limited liability companies, carefully drafted partnership agreements, or enforceable owner agreements.
Business structures to consider are partnerships, limited liability partnerships, limited liability companies and corporations. Nine states, including Kansas, restrict the ability of most corporations and LLCs from owning or operating agricultural land. Therefore, you must ensure any company you set up complies with state law.
If you own land as tenants in common, you need to plan. The plan could be as simple as selling the land. However, if you want the family farm to continue, work through the issues above and create a plan that will promote peace and prosperity in your family.