One of farming's "Holy Grails" is to assemble tracts of farmland that join together as one big block so that the farmer can move from one field to another without having to transport equipment down roads or highways. Such a farmland assemblage saves incredible time, fuel, and equipment maintenance expense, and it allows a farmer to focus all farming activities on crop production and harvest efficiently. It takes generations for farmers to assemble such farmland blocks. It is unthinkable to dedicated farmers that future generations might disassemble them, but the dreaded land breakup is inevitable without careful legal planning,.
Real estate co-owners cannot always agree whether to hold or sell real estate. For that reason, Indiana law has allows a real estate co-owner to sue the other co-owners in a lawsuit known as a "partition" action to force a public land auction.
Partition actions have been part of Indiana law for more than a century. However, an Indiana legislator decided in 2012 that the partition procedures were too inefficient and time-consuming, so the legislator proposed a simpler law that would require a judge to schedule a public auction 30 days after the filing of the partition lawsuit. Jeff Hawkins organized a group of volunteer lawyers to negotiate with the bill's author and persuaded the author to require the judge to order the landowners to hire a civil mediator to help negotiate a solution for up to 60 days, and then schedule the public auction only if the parties could not reach a settlement agreement. The final version of the law gave the landowners that want to keep the land almost three more months to respond to the crisis than the original bill provided, but the partition action remains one of the greatest threats to a growing family farm operation.
So how does a family avoid a partition action crisis? An experienced trust and estate lawyer can provide a couple of ways to solve this problem. One solution involves one or more trusts and the other solution involves a limited liability company (LLC).
A farm owner can protect farmland against partition actions through trust planning. In one trust strategy, farm owner makes a trust as part of his or her last will and testament that puts a trustee in charge of the land after the farm owner's death. In another trust strategy, the owner creates a trust and transfer ownership of the farmland to the trust during his or her lifetime. In either trust plan, the land could remain in the trust for a few generations or the trustee could distribute the farmland to family members. If the trust retains the farmland, the trustee could lease the farmland to a family farm operator and the trustee could distribute farm rent payments to the trust beneficiaries. Alternatively, the trustee could distribute the farmland to the trust beneficiaries with an anti-transfer restriction that limits landowner's abilities to sell the land or folly partition lawsuit.
The LLC strategy resembles the trust strategy in which the trustee retains the farmland in trust, but with some extra benefits. An LLC advantage over a trust that retains real estate is that the LLC can retain income for farmland improvements and other purposes without paying the exorbitant taxes that the trust of a deceased trust creator must pay. An LLC advantage over a trust that distributes farmland to trust beneficiaries is that creditors of a disabled or financially unstable beneficiary cannot assert judgment liens against the vulnerable landowner's real estate share or otherwise interfere with farmland retained in an LLC.
Both the trust and LLC strategies require skillful planning and document drafting to satisfy the family farm objectives. Sloppy drafting can create tax nightmares or tie up the farm in ways that make it impossible for farm operators to continue growing the farm or updating it from time to time. Top-notch trust estate lawyers know how to avoid these problems and design solutions and strategies that balance a farm owner's estate planning concerns for all beneficiaries.
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and Jeff is a Fellow of the American College of Trust and Estate Counsel. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator and was the 2014-15 President of the Indiana State Bar Association.
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