Family Farmland in SD - Business & Estate Planning

[Chad Davis]

Disclaimer:

- I'm a brand new member so, if this isn't how I'm supposed to ask questions, I'm very open to learning the correct way

- This is going to be long and cover multiple multi-part questions; please bear with me

- We've already begun and will continue to speak with a few different lawyers, both for business and estate planning; however, so far they have had conflicting suggestions; hence my reason for seeking additional advice/ideas here

- We've also already begun speaking to a CPA regarding tax implications, but would like additional advice/ideas

Background:

My parents currently own a very large plot of farmland in South Dakota, free and clear of any loans/liens. This land's current tax value is $1.5 million. They purchased it over 30 years ago from my grandparents, but do not recall the amount they paid; although, certainly for a fraction of its current value. I've already begun trying to find what they originally paid for it, because I know it could have a bearing on the decision of how to best move forward in regard to taxes.

For the last three decades, they've rented this farmland out on a handshake deal to the same neighbor. This neighbor has since passed the farming operation down to their children, and thankfully, they've continued to honor the handshake agreement. However, my parents are now starting to think about passing their land down to their five children as well, and we all want to ensure it's done in the best way possible.

Goals:

Thankfully, my four siblings, my parents, and I all agree on the end goal of this farmland. We want our parents to continue to receive the rental income until they've both passed, at which point, the five children will become equal owners of the land.

Additionally, we all agree that we do not plan to ever sell the land, and if we do, it will need to be a unanimous, not majority, vote. Although, there needs to be some option in place should one owner want to be bought out by the others so the land stays in the family.

Lastly, we would love to begin treating the farmland and rental income as a business, if that makes the most sense for our situation, which could eventually be used to purchase more land or invest in other opportunities. This will also include making the current handshake rental agreement more official using an actual lease.

Concerns:

First, taxes are a major concern. We want to minimize the cost of taxes as best as possible. We do know a little about cost/step basis, but not enough to understand how it will apply to each available option. Obviously, we want to minimize the Capital Gains tax as much as possible, but since we don't plan on selling the land, maybe it won't actually apply to our situation. Of course, someday, way, way, down the road, generations from now hopefully, the land will probably eventually be sold. Do we need to be concerned about this now? Not to mention, what other possible taxes come into play, like estate tax if we can't avoid probate, or any other sort of inheritance tax.

Secondly, our father is beginning to have medical issues and there's a pretty good chance that he'll need to be moved into a care facility of some type in the next 5-10 years, if not sooner. Without going on too much of a tangent, our parents are not well off. Yes, I know that receiving rent money from this land alone should've set them up financially, but they have made some terrible decisions over the years and now they're barely living paycheck to paycheck. The rental income is currently being used to pay off their existing loans and financial mistakes. And again, without going into too much detail, they know they could sell the land and be set for the rest of their lives, but that's not an option they're interested in even discussing. This is family land that will stay in the family as long as possible no matter what. My father has stated outright that he'd rather be 'put out to pasture' than see the land sold.

So, they want to ensure the land is protected from any current or future creditors, specifically thinking of potential future medical debt, such as Medicaid liens or estate recovery. We know there is a 'look back' period regarding transferred assets so, we're trying to look into our options now to account for that period of time.

Thirdly, from what we've been told, in SD where the land resides, and in MN where our parents currently reside, land is required to go through probate regardless of there being a will in place. We have been told of something called a 'Death Deed' that can be filed with the county recorder's office, which should allow for the avoidance of probate, but that's just one of several options we'd like to review.

Lastly, as mentioned above, we do have a number of restrictions we want tied to the ownership of the land and how the proceeds will be paid out and reinvested once it's passed onto the children. We know this can be setup after it's been transferred, but it may be something our parents want in writing beforehand.

Oh, and to throw one more wrench in the mix, they own a small farm in MN which we'll want to apply similar tactics to as we do with the SD land.

Options:

Death Deed

From the research we've done, and the one thing the different attorney's agreed on, it sounds like setting up a Transfer on Death Deed is by far the easiest and cheapest option that we should do right now. It will allow the property to bypass probate entirely and guarantee the property will be jointly owned by the five children should something happen to both of our parents. Additionally, it's very cheap and won't stop us from taking further measures like transferring the land into a trust or LLC at a later date.

Unfortunately, this does not protect from creditors in any way. We also need more clarification on how this option would affect the immediate and future tax costs when the land is transferred to the children.

Trust

We've done some research on trusts and are a little confused on the different types, but from what we can tell, the two main kinds are revocable and irrevocable. We're not exactly sure what benefit a revocable trust gives, other than allowing very specific instructions to be followed, over the death deed; especially when it's much more expensive. We do know there are a number of different kinds of revocable trust though so, we could be missing something. The irrevocable trust seems like the best trust option since it completely removes ownership from our parents, meaning creditors can't touch it after the 'look back' period. However, is a trust overkill? Is it just throwing money away since they're the most expensive option to setup? Also, even though our parents would no longer have control over the land, we would still want them to receive the rent money until they pass away. Is this even possible with a trust alone?

LLC(s)

My siblings and I want the land to eventually be its own business to reinvest the profits into more land or other investments. My parents are not against this option at all, but we're not sure how this affects the creditors or taxes. We do understand that an LLC's income and expenses are passed through to the LLC owner(s) in regard to the taxes, but would transferring the land into the LLC cause any Capital Gains tax implications being the that land would essentially be 'sold' to the LLC entity? Also, if we go this route, should there be only one LLC? Since we're looking to purchase more land in the future, should there be a parent/holding LLC that would own individual LLCs that own the land? Keep in mind that it's very cheap to create and renew LLCs in MN and SD.

Trust & LLC(s)

We've also been curious about combining a trust with an LLC. If we understand correctly, our parents could transfer the land into an irrevocable trust which could have an LLC as the sole beneficiary. Then, the children could be members/owners of the LLC, or members/owners of the parent LLC that owns the beneficiary LLC. The LLC(s) would then handle the financial decisions. We're not exactly sure how this could involve our parents so they could still receive the rental income. Would they also be members/owners of the LLC? It seems like this option might offer the greatest level of protection, albeit also being the most expensive and most complicated.

'Sell' to Children

Our father initially assumed the children would simply purchase the land from him and our mother because that's how he obtained the land from his parents. However, that was done specifically to keep the land away from his two siblings. His parents knew they would just split it up and sell it off. This way, their children would still get the money, but my father would own the entire property himself. Since my siblings and I agree to keep the land in the family, we feel this probably isn't the most viable option, especially since the five of us cannot afford to purchase it even at a reduced cost.

Other

Are there any other options available to us?

Thank you!

I apologize for the novel. I know it's a lot, but as I'm sure you can tell, we are very thorough and do our research. We greatly appreciate any and all advice and clarity you may be willing to share for our situation. I'll also restate that we know any advice given here will need to be reviewed by an attorney and CPA separately. Thank you.