Tip #4: Owners of rural land should have a carefully thought-out plan for leaving land to their heirs
This blog is part of the ongoing 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.
Many landowners say they want to leave their land to their children or other loved ones. Their land is often their most valuable asset, but they don’t usually mean that they want to leave the most wealth possible. If they did, they would sell their land when the market was high and leave the money. When someone leaves land to their heirs they usually are hoping to transfer the passion they have for the land and the values of responsibility and connectedness that they feel for the land. Sadly, more often than not these transfers are not successful.
Rather than passion and connection, the land becomes a burden on heirs who are not prepared to accept the responsibility. The land is sold off to pay taxes or debt. It ends up fragmented or neglected or owned by a stranger who has no knowledge or commitment to the land. Another common and sad situation is when a landowner leaves their land in equal shares to several heirs and only one or a few have the passion for the land. This sets up conflict that usually can’t be resolved without selling the land and missing the opportunity to pass on the values the landowner intended to at least some of the heirs. What was a cherished family legacy becomes a bone of contention dividing the family.
Thankfully there are many legal and financial tools available to help a landowner avoid debt, taxes and turmoil for their heirs. Landowners who take the time to plan can leave a legacy with a manageable burden to the heirs who will value it most. The best stewards of the land may not be family members, so the plan might address how to leave other assets to the family. It might even be possible to leave the land as an operating business that pays for itself and generates income for the family.
Any good plan starts with being really clear about what is being left and to whom it is being given. Sometimes landowners feel they have no choice but to divide everything equally between all their closest family members. But, there is no such rule. We are all free to use our best judgment and follow our heart’s desire when deciding the best way to help our loved ones and leave our own legacy. There may be one special person who would benefit most from the land and others who would benefit from cash or different assets. Legal and professional advisors can help with an accurate valuation of assets and strategies for converting one kind of value to another so that each heir gets what the landowner most wants to leave.
Another major feature in every plan for leaving land to heirs should be a strategy for reducing liability and financial burdens. Owning land involves significant costs and responsibilities. Taxes, insurance, and maintenance of fences, buildings and equipment are just a few of the most common costs. Land can be a very valuable gift, but it is not easy to convert its value to money without selling it. Simply selling off parts of the land leads to smaller and smaller fragments and ultimately to an asset that is not worth much to anyone. If the land and other assets are worth more than $5.25 million, estate taxes as high as 40% may be due before heirs can own the land free and clear (see Thomas Hall‘s blog, Will the Federal Estate Tax or “Death Tax” Affect my Estate, Family and Property? to learn more on this). Without a plan, heirs may have to sell land to pay taxes or other expenses. A landowner should always have a plan for dealing with these expenses, so that their heirs are not forced to make painful decisions or accept unsustainable financial burdens.
Every landowner should consider owning their land in a family partnership or limited liability company or other business entity. This strategy has many advantages. First, the business entity provides important protection from liability during the owner’s lifetime, helping to insure that the land isn’t lost because of a health emergency, bankruptcy or serious accident. Second, shares of the entity can be given to future heirs without giving up control of the land. This removes value from the landowner’s estate and reduces taxes owed after death. It also gives the family a way to begin involving heirs and preparing them for the responsibilities of owning land. The entity should really be operated as a family business, so that the ownership of shares comes with real responsibility and understanding of the costs and time involved in land ownership. (See David’s Tip #1 for more on this concept.)
A good plan also prepares for disability, mental and physical, not just death. Giving someone the power of attorney over land is not enough. An agent managing land will need instructions and information about aspects of the land — for example, the activities that maintain an Ag or Wildlife tax valuation. If future heirs are already involved in managing the land through a business entity, they will be much more able to step in and assume responsibility if the landowner loses the capacity to manage the land. (See Thomas Hall’s blog, Protecting You and Your Property- How to Plan for Mental Disability for more on this.)
Finding ways to increase cash flow and liquidity are often key elements in making a plan work, especially if the intent is to treat heirs equally. Government cost-share programs can provide funds to help manage or maintain the property. Conservation easements and sale of development rights can create liquidity to fund tax-free asset replacement strategies, such as life insurance, that in turn can be used to buy out of some heirs or create land management trusts.
If the plan is to leave the land to more than one heir and the desire is for the heirs to continue ownership, then user agreements can make it possible for many heirs to co-own one piece of land and minimize conflict over the use of the property. The ultimate gift may be to leave land as a family legacy with funds to cover the cost of on-going management and a tested user agreement to govern future generations of users.