The Kinney Law Firm
A Professional Corporation
Protect Your Family Ranch Land
By Owen T. Kinney
Most of us have probably read something or heard about the great transfer of wealth that is beginning now and will run for many years to come. The baby boom inheritance phenomenon has been brought about by parents in the 60-85 age range. Their children (whether involved in agricultural activities or not) are and will increasingly come into control of the farms and ranches where longhorns now graze. For those of us currently raising longhorns, whether we can effectively pass that land to our children is still an open question.

The scope of this article must be narrow due to space constraints and is therefore addressed to planning which should be considered to increase your control over the future of family land.

There are a number of characteristics common to rural property owners and their extended families:

  • Many of us are land rich but not so wealthy when it comes to cash or liquid assets
  • Our children donˇ¦t have identical interests in the land
  • Multiple properties may leave the ranch without homestead protection
  • Risk of asset devaluation if auction sale is required to pay estate tax within 9 months of death
  • No Estate Plan, outdated will, inadequate medical directives or no life planning, which necessitates probate court guardianship
The large percentage of total estate assets that are comprised of farms/ranches make rural property owners especially vulnerable to the Uniform Estate & Gift Tax provision in the U.S. Tax Code which requires that estate taxes must be paid in cash within nine (9) months of death. This is particularly a problem when the first spouse dies and the ability of the survivor to stay on the property is dependent on the liquidity of the estate. That is, can the surviving widow (who is statistically more likely to be the survivor) raise enough cash while in the grieving process to pay estate tax without a forced auction of the farm/ranch. Some of the planning tools to avoid this problem include full and proper utilization of a Unified Credit Shelter Trust, development of a business succession plan, a wealth replacement trust funded with insurance, a family limited partnership and one of the newest techniques ˇV a conservation easement.

Each of these tools deserves a separate article due to their importance and complexity, but they all work and each family should determine which one is right for them and then, TAKE ACTION.

In addition to this tax liquidity problem threatening preservation of farms/ranches, the universal fact that each of our children are different presents a challenge. Different needs, different interests or commitment to the land as well as changing relationships among siblings must be recognized if our vision of the future is to be realized. Whether parents decide to treat their children equally or not, it is not always easy to achieve that equality in the childrenˇ¦s eyes. Giving equal interests in a farm/ranch to three children allows a child with an uninsured major medical expense (or for a not so good reason), the power to break up the ranch in order to sell his/her interest whether the siblings like it or not. The benefits of any type of estate plan are so far superior to the one mandated by the Texas Legislature for those who die without a formal plan that no one would knowingly allow that to happen. It has been said that dying without a well crafted will or revocable living trust is the legal professionˇ¦s full employment act.

The objectives my clients bring to the planning table most often include maintaining family harmony, avoidance of estate taxes and keeping the ranch in the family. Taxes and the future of the ranch are intertwined but not necessarily approached in the same manner. In general terms, there are only three ways to reduce how much we pay in estate taxes:
  • utilize both spouseˇ¦s unified credit
  • proper reduction of the gross estate valuation prior to death
  • appropriate use of life insurance to leverage premiums into payment of any remaining tax at a percentage on the dollar
There are numerous methods to reduce the valuation of an estate. The fair market value of a ranch is included in determining the gross estate value, so anything which can reduce that valuation for tax purposes without unacceptable relinquishment of control will be effective. While an outright gift to children during a parentˇ¦s lifetime reduces estate tax, that tactic is not very popular for many reasons. Among the other techniques one should consider are a family limited partnership, a conservation easement and various grantor trusts with retained income interests. Each of these techniques will reduce the tax value of a persons assets while allowing sufficient control or benefits to the owner for the approach to be desirable.

Of these three opportunities for reducing estate valuations, the conservation easement is the newest concept and it is gaining wider attention in the farm and ranch community. Internal Revenue Code Section 170(h), Sec. 2055(f) and Sec. 2522(d) recognizes preservation of open space, including farms/ranches, as within governmental policy sufficient to exclude the easement value for estate and gift tax purposes. What this means is that a rancher may be able to maintain family control of the property, continue beneficial enjoyment of it and still reduce taxes upon that ranch at his death. In some circumstances the conservation easement and how it is structured can eliminate taxes altogether.

Whether a family limited partnership, a grantor trust, a conservation easement or any other sophisticated planning tool is appropriate for a particular family situation is a judgment to be made with professional guidance. This article is not legal advice and action in these areas should be undertaken only pursuant to a personal plan reflecting your specific values and legal circumstances based upon analysis by an individual accountable to you.