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Inheritance of Farms and Ranches

The operation of a farm or ranch is a unique business enterprise. Environmental laws can restrict the manner in which a farm operates. The rise of developments around a farm or ranch can create problems both in the increased value of the land and in conflicts with neighboring homeowners. Passing the farm on to future generations can involve complex issues of tax law.

A number of environmental laws can affect the operation of a farm or ranch. The Endangered Species Act can prevent a farmer from using his land in a way that harms a protected species of plant or animal. This can involve destruction of the plant or animal, removal of important habitat for an animal, or impeding a vital migration path for an animal. Federal laws governing soil conservation can also prevent a farmer from using land in the manner he or she wishes. Often, however, soil conservation goals are accomplished through incentives that encourage a farmer to conserve soil properties, rather than penalties for failing to use conservation practices.

Population growth in agricultural areas can result in significant conflict between farms and neighboring homeowners. Homeowners often complain about noise, odors, dust, and chemical use. Many times, homeowners will sue the farmer alleging that the farm constitutes a nuisance. In response, a majority of states have enacted right-to-farm statutes, designed to protect against nuisance suits brought by businesses and homeowners who move near existing farms. In some states, the statutes create a rebuttable presumption that a farm, ranch, or other agricultural operation is not a nuisance if it operates in conformity with applicable laws and regulations and accepted agricultural practices. The statutes generally only allow a defense to a nuisance suit, not a prohibition to the filing of a lawsuit.

In many instances, right-to-farm statutes protect only against nuisance claims and will not protect against other types of claims.

Example: A neighboring homeowner sues a farmer for trespass, alleging that pesticides applied to the farmer's lands drifted onto the homeowner's property. Although the farmer may have other defenses, a right-to-farm statute may not be applicable.

The population growth around a farm can also mean that the farmland itself has a higher value because it could be sold for development. This can create a dilemma for a farmer or rancher, especially when it comes time to pass the farm to another generation. Estate or gift taxes could become due on land, forcing the next generation to sell some or all of the land to pay the tax. Recognizing this, the federal government has created several mechanisms to allow farmers and ranchers to pass land to the next generation without creating an excessive tax burden.

The federal estate and gift tax laws allow land to be valued at its current use, rather than at its "best use". This means that land that is currently being farmed will be valued as farmland rather than as land which could be sold for development. This can create significant savings for a farm family intending to continue the farming operation. In addition, a small business owner can transfer significant business assets through a gift or will without paying gift or estate taxes. There are significant restrictions on this small-business exception, but it can be very helpful to small family farms.

A farmer or rancher may choose to create a conservation easement. An easement is a legal right to control certain ways in which land is used. A conservation easement gives the holder of the easement, usually a private conservation organization or a government agency, the right to restrict future development on a parcel of land, even though the original owner may continue to use the property in approved ways, such as farming. Some state laws on conservation easements can be complicated. An attorney with experience in state conservation law or real estate should be included in any plan to create a conservation easement.

Probate: How it can be Avoided
The Probate Process

Probate is the legal process by which property in an estate is distributed to the beneficiaries and heirs of the decedent. Beneficiaries are persons provided for in a will; heirs are persons who are entitled to the assets of a decedent under state law where there is no will.

Probate is generally required if the decedent owned property in his or her name at the time of death.

The probate process can be lengthy and cumbersome. It begins with the filing of an application for probate and a presentation of the decedent's will, if any, to a probate court judge. The judge then appoints a personal representative or executor, and may require posting of a bond. The personal representative or executor then collects all of the decedent's assets and ascertains all of the decedent's debts. An inventory is then filed with the court and the debts and estate expenses of the decedent are paid. A final income tax return is filed and an accounting is rendered to the court and approved. Finally, the remaining assets are distributed to the beneficiaries or heirs, and the estate is closed. The process can take from approximately six months to many years, depending on the size and complexity of the estate.

Advantages and Disadvantages of Probate

• The advantages of the probate process include:
  
  • A probate court will normally respect a decedent's designation of a guardian in a will, unless it is to the exclusion of a surviving spouse. A guardian cannot be appointed except through a probate process.
  
  
  • A notice to creditors is published as part of the probate process, and creditors have only a limited period of time in which to file claims against the estate assets. If a creditor does not timely file a claim, the claim is lost.
  
  
  • The probate process ensures that all assets of the decedent are distributed and the estate is closed with finality
  
  


• The disadvantages of the probate process include:
  
  
  
  • The substantial expense of the probate process.
  
  
  • The time spent in the probate process, during which assets are in limbo and cannot be transferred to their intended beneficiaries.
  
  
  • The probate court, rather than the decedent's family, controls the assets of the decedent.
  
  
  • The probate file is a matter of public record, for anyone to see.

An estate planning or elder law attorney can advise on whether the disadvantages of probate outweigh the advantages in particular circumstances, and recommend what, if any, steps should be taken to reduce, if not entirely eliminate, the number of assets that must pass through probate. As with many other legal matters, determining whether and how to avoid probate is a complex legal matter involving the balancing of a variety of factors, including the potential loss of control over assets placed into trusts.

Probate Avoidance Tools

• Joint Tenancy with Rights of Survivorship. Joint tenancy is the easiest and most inexpensive way to avoid probate. It is merely a documentation of title to an asset in two or more persons such that, in the event of the death of one of the persons, the surviving person(s) automatically owns the asset without any need to resort to the probate process. Although many people are aware of the use of joint tenancies by spouses in the ownership of real estate, joint tenancy ownership is also available for brokerage and bank accounts. A joint tenancy with right of survivorship is normally designated by titling an asset as follows: "John Doe or Jane Doe as joint tenants with rights of survivorship." Because both joint tenants are entitled to use the asset during their lifetimes, you should only enter a joint tenancy with someone you fully trust.



• Trusts. A trust is a legal entity that comes into existence when a person (the grantor) signs a trust document which creates the trust, provides for the immediate or later funding of the trust, names a person to administer the trust (the trustee), and provides and contains guidelines for the later distribution of the trust income and assets to one or more beneficiaries. Because the assets placed into trust no longer legally belong to the grantor, they are not included in the grantor's estate and do not have to go through probate. Grantors often name themselves as trustees of their own trusts, and use the trusts for their own benefit during their lifetimes.


• Land Trusts. A land trust is a form of real estate ownership by which you put title to the land in the name of a trustee, but you keep all of your rights to the property as if it remained in your name. The trustee merely holds title. When you die, a beneficiary named in the trust document becomes the owner of the property and can immediately take possession. Land trusts are not allowed in all states and must be carefully drafted where permitted. Consult your attorney.


• Life Insurance. A decedent's life insurance proceeds generally are paid, outside of probate, to the beneficiary named in the life insurance policy. Life insurance not only remains a very popular and viable probate avoidance tool, but also provides a method with which to pay estate taxes without liquidating assets, such as a family business.


• Retirement Plans. IRAs and 401(k) plans include beneficiary designations that provide for a transfer of the assets to a person, normally a spouse, in the event of the death of the plan holder. Anyone considering naming someone other than a surviving spouse as beneficiary should talk to an attorney about the tax ramifications.


• Gifts. You can transfer up to $11,000 a year to any number of persons, free of gift tax. A husband and wife each are entitled to this exemption, so up to $22,000 a year can be gifted to each child of the couple per year. So long as these requirements are met, the person receiving the gift does not have to pay taxes on the gift.


• Pay on Death (POD) Bank and Securities Accounts. Most banks permit their depositors to set up their accounts so that, upon the death of the primary account holder, the funds remaining in the account automatically go to a person named as beneficiary in the account documents. This differs from a joint tenancy in that the beneficiary under a POD account cannot gain access to the account funds until the death of the primary account holder. Many states have passed laws permitting securities accounts to be owned and transferred on death in the same manner. Ask your attorney if this is available in your state.


• Transfer on Death Automobile Registration. Some states permit automobile registrations to be transferred automatically on death in the same manner as POD accounts. Ask your attorney if this is available in your state.


• State Law Exemptions from Probate. Many states allow smaller estates to go through a simplified probate procedure or avoid probate altogether.

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