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Planning for Future Ownership of Farm Real Estate

Farm real estate is a special asset.

For those engaged in farming, it is important to plan for the preservation of the farm real estate so that it may be farmed by both current generation farmers and next generation farmers.

For those not actively engaged in farming, it is nevertheless a valuable, income-producing asset that often has emotional and historical meaning as well.

The challenge in either case is to continue the “family” ownership of the farm real estate in a flexible environment.

If parents own the farm real estate, and then transfer it during life or at death to children, as joint owners, the real estate is at risk.  Any joint owner can force the sale of the real estate, as can a creditor of a joint owner or possibly a former spouse of a joint owner.  And joint ownership is just awkward from a management standpoint.

Placing title to farm real estate in an Irrevocable Trust is a possibility, and is occasionally the right choice; but there is a substantial loss of flexibility in the ownership and management of the real estate.

The better choice is often a Limited Partnership or a Limited Liability Company.  These “business entities” are similar.  Each is a vehicle that can be used to centralize the title to the farm real estate; to provide for succession of the ownership interests in the business entity; to provide for centralized management of the farm real estate; to prevent any individual owner or his or her creditors or former spouses from causing the sale of the real estate; and to assure that the real estate continues to be leased to the current and next generation farmers in the family so long as they are farming.  Both of these business entities also provide protection from unlimited liability for injury to person or damage to property that can arise from the ownership of the farm real estate.

The Limited Partnership and the LLC can be designed to fit the objectives of each individual planning situation.  These entities are also relatively income tax neutral in that the entities can be formed and dissolved without income tax consequences.  They can also be used in conjunction with trusts to accomplish even more asset protection.

If you or your family owns farm real estate, you and your family members may wish to consider forming a Limited Partnership or a Limited Liability Company to own the real estate to plan for future ownership, management, and preservation of the farm real estate.