Passing Your Land To The Next Generation
There is a lot to consider when you plan for the transfer of your forestland to the next generation. There are your goals and wishes, as well as the goals and wishes of your spouse and heirs, the needs of the land, and your heir’s abilities. It’s enough to make your head spin. But the sooner you get started the more time you will have to achieve your goals. And the more peace of mind you will have.
Estate planning is a process that can include a number of documents and legal tools from which you can pick and choose. These various options will allow you—with some creativity—to create an estate plan that will meet your personal goals for the land, meet the personal and financial needs of your heirs, avoid taxes, and maintain good family relationships.
Some of your options include:
Do nothing: It is easy to procrastinate, but if you don’t decide how you want your assets distributed the state will do it for you using a strict set of rules that don’t necessarily include the best solution for the land. It can cause complications for your family members and lead to long-term animosity. Your heirs may end up paying more taxes than necessary, and the land will be subject to probate and may suffer disruption in management, liquidation, and even conversion. Unfortunately, many people choose this option by default.
Will: A will is a simple and relatively inexpensive way to state your desires for dividing up your assets. The problem is that forestland isn’t like other assets and doesn’t lend itself to division. Depending on your long-term goals for your forest, you may want to consider other options along with your will.
Trust: Trusts are a way to shelter some of the tax and other transfer costs that occur at the time of death. They can reduce estate and gift taxes, and distribute the assets within the trust without the cost, delay, and publicity of probate.
Insurance policy: A large insurance policy is one way to help your heirs pay for estate taxes and other expenses after your death.
Gift or sell the forest to your heirs before your death: This option can help reduce estate taxes, although there is some cost involved. You are allowed a federal annual gift exclusion of $13,000 per person so a husband and wife together can give $26,000 to each child. In this way you can pass the property on a little at a time to your children and grandchildren. If you don’t want to lose control of the property during your lifetime, you may want to combine this with a partnership arrangement. If you want to also ensure that the land remains undeveloped, consider a conservation easement.
Create a business structure for your forest: The legal structure determines how the business is managed, how it is taxed, your liability, and how it is transferred. The structure you decide for your family forest will depend on the size and complexity of your business. Two of the more popular business ownership options for family forests include:
Limited Liability Company: Family members join to form a Limited Liability Company (LLC), and they become shareholders in the company. This can be managed by all members or by a manager. Shares in the LLC cannot be sold out of the family.
Family partnership: A partnership can help maintain forest integrity. Management options can be arranged in various ways. Often there are general partners who make all the management decisions, and limited partners who have only a beneficiary interest.
Conservation easement: Land comes with an inherent set of rights, including development rights. These rights can be sold or donated to another party, like a land trust or government agency, to maintain the land in an undeveloped state. If donated, the seller may realize a substantial tax break. In addition, an easement can lower the value of the land, since it can no longer be developed, and thereby reduce estate taxes. The specific terms of the conservation easement are tailored directly to the landowner’s needs and worked out in great detail with the land trust. Conservation easements do not preclude timber harvest; they can be developed for working forests. A conservation easement is permanent. It goes with the deed, and all future owners of the land are bound by its terms.
Taxes are an important consideration as you make plans for your estate. A large tax liability can be a terrible burden for your heirs. In worst cases, it may require them to sell a portion or all of the property to pay off the taxes. A tax professional—tax attorney or Certified Public Accountant—can help you assess and minimize your taxes, including estate tax (both federal and state), capital gains tax, federal income tax, and property tax. The less you pay in taxes, the more you will be able to pass on to your heirs.
Your team of estate planning professionals is one of the best investments you can make. This initial expense is quite minimal compared to the threat of losing the family lands or causing unnecessary conflict among family members. Professionals can guide you through the estate planning process, offer options you would never think of, and save you money in the long term.
One of the best ways to find a professionals is to ask friends and family for recommendations.
Not all are equally knowledgeable. It is important that you choose professionals with specialized knowledge in forestland estate planning as opposed to general estate planning. In addition, she or he should be someone you feel comfortable with and who you can talk to. Ask for an estimate of costs before you proceed.
Your estate planning team will work with you to help you reach your goals. Each estate is different but some of the specialists you might want to consult include: Estate Planning Attorney, Land Trust Specialist, Financial Planner, Tax Professional, Insurance Consultant, Appraiser, and a Registered Professional Forester.
Forest Management Plan
If you were to die tomorrow, would your heirs know what you have done on your forestland and your long-term management goals? If you are concerned about the continuity of your forest, it is important to have a written Forest Management Plan that documents your activities and goals.
Better yet, involve your heirs in your forest management decisions and teach them what you know. Share your love of the land and explain your goals. That way they will be prepared to carry on your legacy as you would wish.
Where to Start?
- Your Family Lands: Legacy or Memory?
This excellent booklet is designed for those who want to protect some or all of their land from development. The true stories illustrate various solutions using creative estate planning.
- Preserving the Family Woods: Tools to Help Guide Transfer to the Next Generation
A booklet with stories, information, and exercises to help you through the process.
- Estate Planning Options for Family Forests
This website and its resources were developed by the U.S. Forest Service because “families and individuals own two-thirds of our woodlands.”
- Ties to the Land “helps transition family forestland from one generation to the next.” Resources include a workbook, DVD, and workshops.
- The Timber Tax Website provides a wealth of information with a page devoted to estate taxes.
- Estate Planning for Forest Landowners: What Will Become of Your Timberland?
This extremely detailed 200-page book covers everything. It’s written for professionals as well as landowners, and provides guidelines and assistance to both. The appendices include the federal forms for filing estate and gift taxes.
- UC Forest Stewardship Series: Forest Taxation, Estate Planning, and Conservation Easements
Another superb publication in the Forest Stewardship Series, this one includes a list of questions (with answers) to ask when choosing an estate planning lawyer.