Oh, the excitement you feel the moment you purchase your first piece of land. You’re filled with plans for the place, whether they are to construct a pond or build your dream home. Perhaps you’re imagining ways to attract wildlife to the property or envisioning a custom-designed gate to welcome your future guests.
While it’s natural to dream of the possibilities that await family and friends on the new property, it’s also true that many land buyers on the verge of a land purchase don’t stop to seriously consider what they want to do with the property in the distant future.
What, for instance, do you want to do with the property down the line? Do you want the property to remain in the family? Do you intend to leave it to your children? And if so, have you made plans to communicate your wishes to your family, not only in a written will, but through heart-to-heart conversations about your wishes?
Benjamin Franklin said, “The only things certain in life are death and taxes:’ He was a wise person, indeed: As much as we don’t want to face these realities, it only makes sense to realize that we must plan our lives with them in mind. There are many complex issues to consider that take much care and forethought.
Robby Vann, Farm Credit Bank of Texas chief appraiser, agrees: “In my 30 years of working in Farm Credit appraisal, I’ve seen how important it is for buyers to not only know the value of their property, but to think ahead on how to increase its value for future generations and to identify their heirs early on.
“It is also a good idea to talk it over with the family and determine what improvements might make the most sense, “ Vann adds. “Then consult with your local Farm Credit lender about such improvements, even before you make the investment:’
One Family’s Story
Consider the following true-life scenario: A West Texas couple, ranch owners with four adult male children, wanted to pass the ranch along to their sons. However, after college, two of the brothers returned to the ranch to work, while their other two siblings chose different 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 couple was able to avoid problems.
As soon as their boys all graduated from college, the parents began talking with their sons about who was interested in continuing the family operation, and who wasn’t. Naturally, the two sons who’d returned to the ranch were interested, but the other two said they also wanted to stay connected to the ranch in some way.
The father started looking at ways to slowly move the land from the parents to the sons. The couple gifted the four young men the property in one transaction, with each of them having equal portions. The parents maintained ownership of the home, some of the land and the ranch equipment. Upon their death, those assets were to transfer to a trust, through which the remaining land assets would be shared among the four siblings, while the ranch equipment would 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 our family scenario, 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;’ below.)
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.”
New Year, New Taxes
With the passage of the fiscal cliff bill, landowners now know what new taxes will apply in 2013 and going forward.
Among the changes is a permanent extension of the $5 million exemption for estate and gift taxes. The law also kept the provision that indexes the exemption for inflation, making the exemption $5.25 million for 2013.
The maximum estate tax rate, however, was increased to 40 percent for estates valued in excess of the exemption amount. The previous maximum rate was 35 percent. Without action, the estate tax would have reverted to the pre-2001 levels of a 55 percent top rate and a $1 million unindexed exemption level.