June 2017
The Business of Farming

A Will Is Probably Not the Best Way to Transfer the Family Farm

The typical Will distribution plan is: "All to my spouse, if he/she survives; otherwise, to my children in equal shares, per stirpes." Per stirpes means by representation, meaning one share to each living child and one share to each deceased child who left issue (children).

If the decedent owned 300 acres and had three surviving children, how many acres does each child receive? The answer is 300 acres. Each child has an undivided one-third interest in the entire farm. What if there had been two surviving children and two surviving grandchildren from a deceased child? The two surviving children would have an undivided, one-third interest in the entire property and the two grandchildren would each have a 16-2/3 undivided interest (half their parent’s one-third interest). [Note: The only way to give a child specific property is to have a legal description prepared and included in the Will.] Now, as joint owners, they all have the right to the use of the entire 300 acres.

What happens if the three children do not agree on the use of the property? The typical farming family has at least one child who wants to farm and one child who works off the farm. Suppose the off-farm child needs money to invest in his business and the farming child does not have the money to purchase the interest of the off-farm child. The off-farm child has the legal right to force the partition of the property.

 

Partition

"The circuit court shall have original jurisdiction to divide or partition, or sell for partition, any property, real or personal, held by joint owners or tenants in common." (§35-6-20 Code of Alabama, 1975) If the land was 300 flat acres it could easily be divided into three equal-value (not size) tracts, and then the children would draw straws to see who had first choice among the tracts. The court must physically divide the property if that is possible. If the land could not be divided because of the terrain, use and/or number of owners, it would be sold and the proceeds divided. If there were 40 acres with a house, pasture, trees and pond, and four children (20 percent each) and two nieces (10 percent each), there would be no way to divide the property and it would have to be sold. Present owners have the right to purchase the property for its appraised value before it is offered at public sale.

 

Business Entity or Trust

A landowner could prevent the partition and management problems by putting the land in a business entity or trust. Children would be either owners of a business or beneficiaries of a trust. As such, they would not have the right to take their share from the business or trust, and, if set up correctly, the children could not be sued or divorced out of their share. In addition, a general partner of a limited-liability limited-partnership, a manager of a limited-liability company or a trustee of a trust would manage the property and it would not be necessary to get complete agreement from every owner/beneficiary before making a decision.

The entity could be organized to allow the farming child to rent the land. Then, the entity could distribute income among the owners/beneficiaries so all the children could be treated equally.

Which option would be best for you?

Alabama Extension is offering a program on estate planning for farmers and other landowners at several locations around the state. The topics in this article will be discussed in more detail and attendees will have a chance to ask questions of an attorney.

For more information and to register for a program, visit www.aces.edu/estate-planning-for-farmers.

 

Robert Tufts is a member of Alabama Cooperative Extension System’s Farm and Agribusiness Management Team. He is a professor emeritus at Auburn University, and is currently a visiting professor with ACES.