When it comes to keeping the ranch in the family from generation to generation, Rolan Petty’s experience is much like that of many farm and ranch families. After college, two Petty brothers returned to the Sweetwater farm and ranch operation, but two chose other career paths.
For many families, that might have created a dilemma when the time came to transfer ranch ownership. But with planning and communication, the Pettys have avoided problems.
“After we got out of college, my parents started talking with us about who was interested in continuing the family operation, and who wasn’t. Two of us were, and while two weren’t, they did want to stay connected to the farm,” says Petty, whose family does business with Lone Star Ag Credit.
“About two years ago, my dad started looking at ways to slowly move the land from them to us. They gifted the four of us the property in one transaction, with each of us having equal portions,” he says. His parents maintained ownership of the home, some of the land and the operating equipment; upon their death, those assets will transfer to a trust, through which the remaining land assets will be equally shared among the four siblings, while the operating equipment will go to the two brothers running the business.
Gifting and trusts, as well as limited liability corporations and partnerships, are among the options parents can consider to ensure their land stays in the family. Regardless of the strategy, however, communication and planning are the underlying keys to successfully keeping property in the family across the generations.
Whether you want to pass down the ranch, a country home, the family hunting cabin or a weekend river getaway, here are some factors to consider.
Making the Transfer
Gifting is a tax-wise way to pass down ownership in a recreational property or farm tract. Each parent may gift up to $13,000 annually in property value to each heir tax free. So, in the case of the Petty family, for example, the parents could gift a total of $104,000 annually (4 sons times $13,000 from mother and $13,000 from father).
“I encourage parents to begin this early on if gifting will not adversely affect their finances and quality of life,” says Dr. Wayne Hayenga, professor emeritus and Extension specialist with Texas A&M AgriLife Extension Service, who has doctorates in both agricultural economics and law. Taxes may be avoided, and the children can begin learning and working together in their new ownership roles.
Options for the legal structure read like an alphabet soup of acronyms — LLPs, LLCs, S corporations. Then there are other forms of ownership, as well: trusts, family trusts, life estates, tenants in common, close corporations and more. Each entity has its own pros and cons and shouldn’t be entered into without extensive research, discussion and the advice of legal counsel. (See “Useful Resources.”)
Ultimately, the best approach, says Hayenga, is to “let the living people — the heirs — handle things as they wish, rather than being restricted by decisions made by the deceased.”
“Saving the Family Cottage: A Guide to Succession Planning for Your Cottage, Cabin, Camp or Vacation Home.” Published by Nolo, this book gives practical advice in layman’s terms on everything from choosing the right legal entity to avoiding the tax bite.
Keep the Ranch in the Family: Ranch Estate Planning Workshops. Offered throughout the year in Texas by Wayne Hayenga, these seminars cover estate tax rules, tax reporting requirements, and useful tips for potential executors and trustees.
Landowner Legacy Communication© Programs. Ginny and Allen Nipper designed these workshops specifically for private landowners. The intent is to help facilitate family communication that aids in a smooth intergenerational transfer of family assets.
Having the Crucial Conversations
Regardless of the structure, parents should consider some important questions:
1. Who is in charge? — Will you elect that person, designate the role to the oldest living descendant, or let each family have a vote?
2. Will spouses, stepchildren and other non-blood descendants have an ownership interest? — “Our agreement with our children specifies ‘blood descendants,’ and that is what we tell people in our presentations,” says Allen Nipper. He and his wife, Ginny, Louisiana Land Bank customers, own and manage land and timber in Louisiana and Arkansas — property they inherited, as will their children some day. The Nippers conduct family planning communications workshops to help families have the crucial conversations needed when transferring property.
3. How will use of the property be fairly distributed? — “What if one child is living three miles away, and one lives in New York City and won’t use the property as often?” asks Dr. Wayne Hayenga.
4. How will your descendants pay for it? — “The parent wants to pass on the ownership, but not the liability. The most successful situations are when there’s a fund of money set aside to handle repairs,” Hayenga says. “If not, you need to consider in advance how those expenses will be allocated — is it based on usage, shared equally, or otherwise?”
5. What if an heir doesn’t want it? — “Grandparents want to do this, but grandkids are all over the world today — working, in the military, in school,” says Hayenga. Some won’t have the financial means and ability to contribute to ongoing maintenance and expenses. “If one says, ‘I don’t want 12 percent of this, I want to sell my portion,’ will the other heirs be required to buy them out?” he states.
In that event, does the family get first right of refusal, is it sold to the family at a discount or how is the value determined?
“You can put a first right of refusal into an agreement, but then what’s the value?” asks Ginny Nipper, who herself had the opportunity to buy one of her siblings’ land interest, but the price was too high. “In a family situation, maybe there should be some concession, a little better deal just to keep it in the family.”
6. Talk it out. — Early, regular and deliberate communication is critical. Allen Nipper says that while his dad communicated with him and his three siblings individually, “We never had a family meeting with minutes, an agenda” that documented the discussion and what was agreed upon.