This blog is part of the on-going monthly series, Top Ten Legal Tips for the Owner of Rural Land In Texas written by attorney and firm principal, David Braun. Through this series, we hope to help owners of Texas rural land better understand the extent of their rights, and even discover some new ways to protect and preserve their land for generations to come.
When someone owns land in his or her own name, they are very likely increasing their risk of loss from accidents or creditor’s claims unnecessarily. Accidents on farm and ranch land happen every year and create liability for landowners – sometimes forcing liquidation of family land or loss of other major assets. It is often wiser to own land through a limited liability entity like an LLC, a Limited Partnership, or an irrevocable trust, so that the liability is isolated from other assets. These entities also protect the land from other personal and business creditors.
A major exception to this tip is for Texans who live on their land, because Texas law gives even greater protection from creditors for homesteads. A rural homestead can include up to 100 acres for an individual or 200 acres for a married couple. For owners of more than 200 acres who live on their land a combination of strategies may provide the best protection. Successfully claiming the full rights to homestead protection often requires pro-active legal steps, which we will cover later in this blog series as part of Tip #3.
Modern Rural Landowners Should Take Extra Care
Hunting, swimming, horseback riding, and 4-wheel driving are all common outdoor activities that can be dangerous and result in accidents on private land. A majority of modern rural landowners are actually city dwellers who own second homes on rural properties, where they invite guests for recreation. Hosting friends and family on these properties is one of the joys of land ownership, but innocent recreation can turn into tragic accidents when the guests are not trained and familiar with the dangers. Extraordinary care should always be taken to prepare and protect guests from accidents. But, wisely protecting financial assets is also part of managing the risk of land ownership.
Limited liability entities protect assets from two directions. By isolating a farm or ranch in an entity and managing it as an asset of that entity, the land is protected from business and personal creditors, and in turn other assets are protected from accidents that create liability in excess of the value of the land. The key is limiting liability to its source. A business setback or a medical crisis does not have to force the sale of beloved family land, nor does an accident at the ranch have to burden a personal business or force the sale of other prized assets.
An Entity is a Multi-Use Tool
The choice of an entity to own a farm or ranch is very dependent on the specific facts and situation of the owners. In addition to liability protection, an entity can be a very useful tool for estate planning which can open up other considerations when choosing an entity to accomplish multiple goals. Consultation with an attorney, and possibly a CPA, is essential for choosing between partnerships, trusts and other liability limiting entities. One size does not fit all, so it is important to consider all the goals for the land and the family in consultation with a broadly qualified professional.
Estate planning for a landowner can include many goals. Owning and caring for land is a big job learned over many years. Younger generations benefit by gaining experience over time. A partnership or a family company provides a method for sharing knowledge before turning over complete control. As younger family members become more involved, shares of ownership can be transferred, and responsibilities can be shared and shifted gradually over years. The entity also gives a method for gifting or selling the land between many family members without fragmenting the land. Finally, by owning the land in an entity, a family can avoid significant court costs and legal fees when the principal owner dies or becomes disabled.
Risk Management Requires Diligent Maintenance
Setting up an entity is just the beginning of managing risk and liability. The entity must maintain records and be operated for a business purpose. Without legitimate operations, a court may decide that an entity is a sham which is not deserving of limited liability. Annual meetings, tax returns and otherwise maintaining a business purpose may be necessary if the entity is to be successful in fulfilling its function. Again, consultation with a competent professional is the best way to know for sure that the entity is being operated correctly. Braun & Gresham has an entire practice area devoted to helping landowners with risk management.
At Braun & Gresham, we represent many landowners with many different stories. It constantly amazes us how often we encounter landowners who own their non-homestead land in their own name. Whether motivated by liability or estate planning, or some other issue, it is a fundamental tenet of modern land ownership that holding such a major asset by an entity ought to be considered. The peace of mind it brings and the numerous problems that it can solve is usually worth the effort and cost of creating an entity to hold your precious land.