Using Business Entities for Farm
Management, Risk Reduction
and Succession Planning
Robert A. Tufts, Ph.D., J.D. LLM (tax)
Robert L. Page, CPA
Alabama Cooperative Extension System
Auburn University
Landowner Concerns


Landowners want to generate income from their
property while protecting it for future generations
Barriers they encounter to meeting their
objectives are:
• Possibly estate taxes,
• Management of the land by the next generation,
•
and
Risks from bad business decisions and lawsuits
Estate Taxes

American Taxpayer Relief Act of 2012
• Reunified gift and estate taxes
• $5,000,000 applicable exclusion amount made
permanent and adjusted for inflation
• $5,450,000 for 2016
• 40% maximum tax rate
• Portability made permanent
• Basis step-up for transfers at death
Estate Tax Planning

Estate tax planning is essentially a gifting program
where assets are transferred to the younger
generation for no or reduced taxes
•
First, use tax-free gifts to the extent possible
•
Second, use annual exclusion gifts §2503(b)
•
• Medical and tuition
• $14,000 per donee per year
Third, make gifts up to the available applicable
exclusion amount (since gifting removes income and
appreciation)
• Use split-interest gifts (QPRT’s, GRAT’s etc.) or gifts that
qualify for a discount (minority interests in a business
entity)
Property Management



Management of the family farm is a typical
problem for second- and third-generation owners
Parents typically leave undivided interests rather
than having property surveyed and divided
Commonly owned property is managed jointly by
the cotenants. This does not mean that each one
must participate in management but only that
each has an equal right to manage or control
how the property is used.
Partition


As the number of owners increases it becomes
difficult to agree on management objectives
Partition is the only remedy when joint owners
cannot agree
• Property will be physically divided if possible
• The more varied the topography and the greater the
number of owners the less likely
• If the property cannot be physically divided it will be
sold and the proceeds divided
Preventing Partition and Managing
Property with a Business Entity or Trust
• A trust or business entity can be used to prevent
partition and benefit children equally while vesting
the management in one or two individuals, e.g.
parents
Business Entities in Alabama

Single Owner
•
•
•
•
Sole proprietorship
Limited liability
company
Corporation, S or C
Business trusts

Multiple Owner
•
•
•
•
•
•
•
•
General partnership
Registered limited
liability partnership
Limited partnership
Limited liability
company
Corporation
Business trust
Cooperative
Real estate
investment trust
Which business entity should you
choose?

It would depend on which characteristic is most
important to you
• Limited liability
• Participation in management
• Transferability of interest
• Financial rights
• Classification for tax purposes
• Creditor protection
Liability of Owners
GP/RLLP
LP/LLLP
All partners are
liable jointly and
severally for all
obligations of the
partnership
General partners
Members are not
are jointly and
liable for obligations
severally liable for of the LLC for acts
the debts of the LP or omissions of any
Limited partners are other member
not personally liable
A member may
The GP’s in an
become liable
LLLP are not
because of his own
personally liable
conduct.
A partner in an
RLLP is not
personally liable
LLC
Corp.
A shareholder is not
personally liable for
the acts or debts of
the corporation
(except amount
contributed)
“Piercing the
corporate veil”
Desirable Characteristics of the
Business Entity


Limited liability
Maintain control while giving interests to family
members (unity of management)
• Avoids veto power of small owners



Limited withdrawal rights
Owners can transfer income interest but not
management rights
Creditor/asset protection
Desirable Characteristics of the
Business Entity





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Facilitating gifts
Discounted values for entity interests
Can be used to reduce estate taxes
No taxation at the entity level
Perpetual life
Avoids ancillary probate
Provides a succession plan
Using a Trust Instead of a
Business Entity


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When the parents can no longer manage the
business (age, infirmity or death) the younger
generation will assume control
Once the next generation controls the business
they can dissolve it (requires a super majority)
A trust can be used to hold the land and prevent
the sale
• The life of a trust is governed by the rule against
perpetuities
Trust

An agreement between a grantor and trustee
that sets management and distribution criteria
• Grantor writes and funds the trust
• Trustee has legal title to the assets


Assets are held for beneficiaries who have
equitable title but not legal title or management
rights
Trusts can be
• Revocable or Irrevocable and
• Living or testamentary
Trust


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The trust would have many of the advantages of
a business entity, such as limited liability, creditor
protection, succession plan, etc.
The trust would not have perpetual life and
beneficiaries cannot transfer their interests
Biggest advantage: control over the timing and
condition of distributions
Conclusion

With a little planning it should be possible to save
the family land
• Tax planning can save all but the largest land
•
holdings
A business entity or trust can provide a long-term
management plan and prevent the land from being
subdivided