When planning your land’s succession strategy it is incredibly important to take the proper steps to ensure that your farm, ranch, or forestland remains whole and a productive business, especially when multiple heirs are involved. One important step is to include your heirs in the decision making process. Even if they are not directly involved in the conversation, you should make sure to gauge their level of interest in running the family business or participating in co-ownership. You might also consider their skills, abilities, and compatibility.
If you do not fully consider ‘the who’ and ‘the how’ of your land’s succession strategy, and simply pass the land to your heirs as co-property owners, you run the risk that one or more heirs will want out of the co-ownership. In some cases, your heirs might be able to work out a plan among themselves to split the land and management roles, perhaps one heir will be able to buy out the other. However, this is not always possible, especially when your estate is land rich and cash poor.
When your heirs cannot agree on how to share the land tensions can run high and a civil agreement may not be able to be reached. In this situation, a court may need to become involved and order a partition. Any co-property owner has the legal right to request a partition of the land. So, even if another heir is interested in keeping the land whole and running the family business, they cannot stop a partition.
To obtain a partition, the heir must go to a court and request one. The court will then choose between three types of partitions:
- Partition in kind: or a physical division of the property depending on each co-property owner’s percentage of ownership.
- Partition by allotment: or where the court gives full ownership to one co-property owner and orders them to buy out the other owners depending on percentage of ownership.
- Partition by sale: or where the court forces a sale of the property and divides the profits among the co-property owners depending on percentage of ownership.
All three of these orders can result in the end of your hard earned family business. To prevent a partition it is important to plan for the transfer of your land well in advance, taking into consideration your heirs. During this process, it is important to remember that passing your land and business to future generations may not always be fair, but passing the farm to one willing and able heir to the exclusion of other heirs may be necessary to ensure that the land will remain viable and productive. Don’t forget, there are ways to compensate the other heirs that do not want to take part in running the family business, such as through purchasing life insurance
or PDR programs