Is an LLC the Right Farm Succession Tool for my Family?

Submitted by J.P.

I farm with my two brothers and my son. My brothers and I own the farm assets equally. We were going to put our land in an LLC, but my brother was just advised that LLCs aren’t as effective today given the higher estate tax limits and change in our state’s partition laws. Is the LLC still a good tool for farm succession? 

The solution:

Sometimes I will buy a tool at the hardware store just because it looks fantastic. I almost wish I had the problem that the new shiny tool fixes! Unfortunately, the same approach is often taken with entities, estate documents, and financial products. Every tool has a purpose. The real question is always, what problem are you trying to solve?

LLCs grew in popularity several years ago as a tool to minimize estate taxes. A well-planned entity could qualify for discounted estate valuations due to lack of marketability and minority interests. LLCs also solved partition sale concerns in some states by avoiding split ownership on a deed. However, recent laws have reduced the impact of estate tax and partition sales for some family farms. 

Were these your only two considerations for establishing an LLC? What are your goals for your son and the farm? Have steps been taken for him to buy out his cousins some day? Will multiple families be long-term landowners? If he plans to buy the land from his aunts’ and uncles’ estates, you might be OK with signed rental and purchase agreements. If extended family members will own land, then an entity could make sense.

An LLC is controlled by its operating agreement. The original owners set the terms (management control, rental options, and purchase agreements). Each brother could direct how his units transfer to his family through his estate plan. However, the terms of the operating agreement must be maintained by all future owners. This provides operational consistency. Changes could be made providing the percentage of votes (also set by you) is met. 

Could other problems arise? If land is split between families, are you concerned about an in-law owning land from a death or divorce? You might identify permissible vs. nonpermissible owners with different buyout structures for each. Is land stewardship a concern? Maybe minimum fertility levels should be set, and a percentage of cash held back for improvements. Would the kids ever want to leverage the farm for expansion? That may be difficult if deeds are shared between heirs or are held in trust. A creative adviser can find multiple paths to solving each of these issues. Sometimes, though, it’s easier to include them in a multipurpose tool like an LLC.

Remember, multipurpose is not the same as one size fits all. Some farms, often the home farm or livestock facilities, might be better for the farm heir to own individually through a buyout or an equalization strategy. The farm heir might need land to control or collateralize someday that is outside the off-farm heirs’ influence. The LLC doesn’t have to be an all-or-nothing proposition.

Focus on your goals and the core problems. Then find the right tools to match. Don’t discard an entity just because a few features might not be applicable. If I lose the power windows in my truck, it’s not like I lost my four-wheel drive. I may not use all the features, but I can still drive through the storm. The same is true with farm entities.