Protecting Family Land

Owning a farm, timberland, a vacation property, or income-producing real estate with others as tenants in common can be dangerous and uncertain. Without some precaution, your co-owner’s problems can become yours. Tax liens, divorces, and judgments can control the ultimate fate of your property. One person can control whether the property is left intact or partitioned.

You can put more comprehensive protections in place if you do so before the land is divided. There are legal protections that you can put in place when you give property to others, either during your lifetime or at your death, that the recipients could not implement for themselves. Operating guidelines are also easier to draft when first-generation owners create an entity before passing property down to future generations. However, family members who have purchased or inherited property together can also create a jointly owned entity to manage and preserve assets.

Family entities can be structured in several different ways. We often use trusts, limited liability companies (“LLCs”), or a combination of the two for this purpose. If property has not yet been divided, we often leave LLC interests to trusts created for the next generation. When property has already been purchased or inherited by multiple owners, we typically use LLCs owned by individuals for this purpose. LLCs provide asset protection, tax flexibility, and the ability to establish the governance of the organization. While rules for governance are not a substitute for family harmony, they do provide a default structure that can only be changed under the terms of the agreement. Trusts can provide another layer of asset protection and transfer tax planning.

There are difficult issues that must be considered when creating the rules that will govern the operation of the company. Determining who will make decisions in the future, what transfers are acceptable, and how to address unauthorized and accidental transfers ownership, how to value membership interests interest, how to structure voting rights, how to deal with tax elections, the scope of the manager’s fiduciary duties, and how to resolve disputes, can all be difficult issues when multiple families are involved.

These issues highlight the need for a carefully crafted operating agreement. If you form an LLC with others, working through these issues can be difficult. However, it is much easier to address these issues before a problem arises. Even if you are the sole owner of an LLC, planning for these issues can avoid problems in the future.