Land Succession Strategies Guided by Future Use

Sisters Julie Moore and Nancy Hackney are the last direct heirs of a parcel of land in Texas that goes back to the 1880s. For these fourth-generation landowners, the property is a legacy that brings back bright, humor-filled memories of their adventurous forebearers.

"The story goes that our mother's family, who were from New York, took one look at the Alazan Bayou that ran through this land, and they went right back to the Northeast," Moore laughs. "They eventually came back and were early settlers. We both have framed copies of the Texas Declaration of Independence signed by our great-great-grandfather, Stephen W. Blount. That's how connected our family is with the state of Texas. There's a lot of love for this land, and we want to honor that."

Moore says neither she nor Hackney have children, so when the family land passed to them from their mother, Mary Martha Ingraham Hackney, they initially considered offers to divide and sell it for homesites and development. But, they decided the highest and best use of the property was for it to remain in timber and wildlife. They started looking for a way to preserve that while still being able to sell the land and have a monetary return. They turned to the Texas Agricultural Land Trust (TALT) for help.

"We knew we wanted to protect the land with a conservation easement. Working with TALT, we've done that, and we now have a conservation buyer interested in using the property as part of a mitigation bank. That appealed to us because this will be part of at least 1,400 acres of contiguous land," says Moore, who had a long career as an endangered species biologist, working for the Bureau of Land Management and the U.S. Fish and Wildlife Service, where one of her primary areas of focus has been preservation of longleaf pine forests.

KEEPING RURAL COMMUNITIES INTACT

Chad Ellis is CEO of TALT. For him, landowners such as Moore and Hackney are critical to keeping land and legacy in Texas strong.

"A conservation easement is just one tool," he explains. "It's not the right tool for every situation. We look for as many creative ways as possible to help our state's land stewards find financial incentives to preserve land. Today, that may include carbon markets or even water markets along with conservation easements."

Ellis is from the small town of Lohn, Texas, where he grew up with a farm and ranch background. He knows a lot about the DNA of small ranch and farm communities, and believes it's important to keep that intact for future generations.

TALT, which has been operating for 15 years, is unique in that it was developed by producers for producers. Three grassroots organizations -- Texas & Southwestern Cattle Raisers Association, Texas Farm Bureau and Texas Wildlife Association -- came together to create TALT. Since then, the group has helped 50 families with conservation easements, adding up to more than 270,000 acres of land, and 1,500 miles of rivers, creeks and streams.

One of the things that made the sisters' land a good fit for TALT was its size. Mostly used for timber and hunting, the property extends into two counties, Cherokee and Nacogdoches, and totals about 656 acres. A good portion is river land and river bottoms, all around the Angelina River. Moore says her grandparents sacrificed to hold onto this property over the years, and her grandmother, Willie Blount Ingraham, was an outdoorswoman who loved to hunt and fish, and take care of livestock.

"I don't know that my grandmother considered herself progressive, but I do know that what happened to this land was important to her, so it's important to us too," she adds.

It's easy to be intimidated by the idea of creating a conservation easement. The process can be different state to state and even agency to agency. At TALT, it can take anywhere from six months to a couple of years to complete the process. And, there are expenses that go along with creating an easement, including closing costs, appraisal fees, attorney fees and a one-time stewardship fee that pays for monitoring of the easement going forward. The TALT board makes decisions about which land the Trust accepts, with one goal being to keep working lands working.

"We aren't taking these lands out of ranching or production. We want to see that continue," Ellis explains. "We don't dictate management of these easements either. We believe the owners, the stewards, know how to manage their property best. So, they call the shots. The only thing we work with them on are development rights, which we hold. We annually monitor the easement to be sure something hasn't happened there that goes against the agreement. It is never our intention to hinder the freedom to operate. That is one of our guiding principles."

Because every family situation is different, every conservation easement is written to meet different goals and objectives, Ellis stresses. One of the more common scenarios is where one child in a farming family wants to work the operation, and the other children do not.

"We make sure everyone has options in cases like that," he says. "We find that some families need more liquidity out of their land for retirement or for transition funds to help that next generation take over the reins. We even use operational endowments to help with costs of repair and maintenance."

TALT works with three types of conservation easements, Ellis says. The first is where a landowner donates the entire easement, resulting in tax benefits over a 15-year period. Another approach allows for the sale of the land with an easement in place, providing direct compensation to the landowner but limiting how the land can be used. This reduces the value of the land and can be important in estate tax considerations for future heirs. A third form, something TALT calls a "Bargain Sale," provides for a portion of the transaction to be paid and a portion to be donated.

THE LLC AS A PATH TO SUCCESSION

If a conservation easement isn't the best fit, there are other options landowners today can consider when passing down land, some aimed at providing a pathway for beginning farmers into agriculture. One that's getting more use in recent years has been the LLC, or limited liability company.

Fran Miller, senior staff attorney and adjunct faculty with the Vermont Center for Agriculture and Food Systems, says in the Northeast where land has become extremely expensive, selling or passing down a family farm can be a complicated decision.

Urban encroachment and the need for housing makes it tempting to just sell farmland. Heirs aren't always interested in agriculture. The most recent statistics from USDA show only half of farmland transfers across the U.S. were within the family. This creates a need to connect exiting and entering farmers.

"Landowners, particularly where the operation is large enough for them to have made a living in agriculture, often have invested so heavily in that farm that all of their equity is tied up in it. To get that equity out for retirement, they are often faced with having to sell the land. But, first-time farmers don't have the resources to buy it," explains Miller, noting that an LLC provides a way to sell land over time so ownership shifts more gradually.

"Gradual succession can help the exiting farmer maintain quality of life through retirement, allowing him or her to continue to live on the farm. It also gives the entering farmer time to gain experience in managing the land and the business," she explains.

In this example, the landowner holds the controlling share of the LLC, while the first-time farmer increases his or her share of the farm over time through their contributions, both monetary and labor. How it works is spelled out in an LLC operating agreement between the parties.

"One year, the new farmers may receive none of the profits, but their labor contributes to the business, so they receive a larger share in the LLC," Miller explains. "Maybe they get vegetables, meat or housing in addition to that share. This is essentially a way to buy out the exiting farmers. This takes trust and relationship building. There has to be a connection and very good communication. You are running a business together, and that isn't always easy."

The LLC is also often used to transfer ownership of the farm to the next family generation, especially where there are multiple heirs.

Robert Moore, attorney and research specialist with Ohio State University Agricultural and Resource Law Program, says: "When there are multiple owners of the land, the LLC is a good vehicle because the land can only be sold with the consent of the family. It prevents one person from forcing a land sale."

LLCs, Robert Moore adds, are indefinite in terms of how long they can exist because they are essentially a business entity designed to transfer from one generation to the next. And, with that comes the ability to terminate the business if that makes sense, as well as privacy.

"You can see there is an LLC that holds the land, but you typically can't see who owns the LLC," Robert Moore explains. "So, ownership can transfer, and that is not public."

He says typically the LLC is also going to be less expensive to set up than a conservation easement, and, in many states, there are no ongoing fees once it's established. The LLC manager files a tax return and pays real estate taxes, as well as manages the property.

Vermont's Miller adds the beauty of the LLC is its flexibility. "You can structure it so that the share of control shifts to the children, or your successors, over time, and at your death the whole LLC is controlled by them. Because the LLC holds the land, we may reduce estate taxes at the federal level. You can even give yourself a life estate in the property, and at your death, the LLC owns it. With an LLC, you can elect to pay taxes either as an individual or as a corporate entity. In other words, there are options, and in many cases, those provide an advantage to the landowner."

MORE FINANCIAL AND TAX TOOLS

Tax and legal professionals experienced in succession planning are the best place to start when considering what options landowners have available today. In addition to conservation easements and LLCs, they can help define how life insurance and trusts can be used as part of a plan to pass down land.

Life insurance proceeds, for example, are one way to give those who inherit an operation that is land rich and cash poor a way to start off on the right foot. Be aware, however, that this could be considered a part of the estate, which might have tax implications. One way to avoid that is by having the beneficiary take out the policy and pay the premiums.

Another common way to pass down the farm is through the use of a family land trust. Here, a trustee is named with the legal authority to manage trust property after the holder's death, dividing income and principal among the trust's beneficiaries as set out by the creator of the trust. The trustee pays taxes and expenses, and is held to a level of fiduciary responsibility. There are time limitations on land trusts.

While the land is the thing most people think about when transferring a farm operation, it's not always the area where the most critical challenges arise.

Kelvin Leibold, Extension farm management specialist at Iowa State University, commonly sees issues around the transfer of labor, the transfer of management and the transfer of assets. He writes that control is often at the top of the list of concerns.

The older generation may be willing to give up labor but not much control. This is why there needs to be a plan in place to transfer management to the younger generation.

Leibold says the on-farm business partner/heir needs to know that in the future, he or she will have control of the business. Off-farm heirs, on the other hand, need to be assured of a reasonable return tied to their inheritance. Trusts can be useful tools to establish the rules for both groups to work together to achieve the older generation's goals for the business.

A CONSERVATION EASEMENT STEP-BY-STEP

At Texas Agricultural Land Trust (TALT), landowners who want to establish a conservation easement will work their way through a process that looks like this:

1. Contact TALT and let them know how long you've owned the property, where it is located, how many acres are involved and what your goals are for conservation.

2. Visit a land attorney and a tax adviser about the implications of placing a conservation easement on the land.

3. Schedule a site visit with TALT staff. Include family members, and have a designated contact person for TALT to work with as the project moves forward.

4. Complete an application, and pay an application fee of $1,000, plus any applicable grant application fees.

5. The TALT board of directors reviews the application and makes a decision as to approval. After that, the landowner meets with the full TALT committee.

6. Once approved, an agreement is signed outlining next steps. At this time, half the coordination fee is due, which is $7,500 for a donated conservation easement and $8,000 for a purchase conservation easement.

7. Document collection begins, which will include a title report, appraisal and a mineral rights assessment.

8. Work with TALT to create a baseline inventory report for the property.

9. A Deed of Conservation Easement is created. Any monetary liens on the property will have to be released.

10. TALT's board of directors will have final approval of the deed.

11. Closing is held, with documents delivered to the County Clerk and Recorder. All remaining fees are due.

12. Annual monitoring of the easement begins to make sure the landowner's goals are met in perpetuity.

ESTATE TAXES COULD CHANGE FOR 2026

It's sure to be a hot political topic, but for now, landowners should have the year "2026" firmly in mind. That is when the current lifetime estate and gift tax exemption rate, now at $12.92 million for individuals and $25.84 million for married couples, will be cut in half and adjusted for inflation.

The Tax Cuts and Jobs Act of 2017 nearly doubled the lifetime gift and tax exemption for individuals and couples. Prior to that, the exemption for individuals was $5.6 million and $11.18 million for couples.

Families that may face an estate tax liability under those parameters should explore available options early, including transferring assets out of their estates.

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FOR MORE INFORMATION:

-- Texas Agricultural Land Trust: https://www.txaglandtrust.org/…

-- Farmland Access Legal Toolkit: https://www.vermontlaw.edu/…

-- Vermont Center for Agriculture and Food Systems: https://www.vermontlaw.edu/…

-- The National Agricultural Law Center: https://nationalaglawcenter.org/…

-- Ohio State University Agricultural and Resource Law: https://cfaes.osu.edu/…

-- A Snapshot of LLCs and Farming: https://farmoffice.osu.edu/…

-- Ag Decision Maker Iowa State University: https://www.extension.iastate.edu/…

-- Follow Vicki on Twitter @myersPF

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