Often the most difficult asset for which to plan in an estate plan is non-commercial real property such as a family farm, a hunting cabin or other recreational property. This is especially true when the property makes up a large portion of the estate. This article will briefly discuss five options a testator, i.e. a person making a Will, can consider for disposing of this type of property, each of which has advantages and disadvantages that can and should be discussed with an experienced estate planning attorney.
The first option is for the testator to provide in his/her Will that the property is to be sold at death and the proceeds are to be distributed to the beneficiaries. The advantage of this approach is that it is a simple, straightforward process. However, the obvious downside is that following the testator’s death, the property is no longer owned by the family. That said, under this approach, there is nothing that would prevent a beneficiary from purchasing the property so as to keep it in the family.
The second option is to leave the property to the beneficiaries as tenants-in-common. “Tenants-in-common” simply means that each beneficiary would have an equal, undivided interest in the property. One benefit of this approach is that the property will remain within the family for future use and enjoyment. The disadvantage is that, because each beneficiary has an undivided interest, they all share in the use of the property as a whole, which can be problematic if the interests of the beneficiaries differ or are in conflict. In addition, under this scenario, each beneficiary can sell, lease, mortgage, etc. his/her undivided interest in the property, which may or may not be consistent with the other beneficiary’s interests. In the event that there is a disagreement among the beneficiaries as how to manage the property which cannot be resolved by the beneficiaries themselves, one or more beneficiaries can petition the Court to have the property partitioned, i.e. divided in size in proportion to the number of beneficiaries or sold with the proceeds distributed to the beneficiaries in proportion to their interest. This process can be costly, however, so the testator may want to consider up front whether the interests of the beneficiaries are in line with each other prior to pursuing this option.
The third option is to subdivide the property and leave the subdivided parcels to the beneficiaries. A subdivision can be done during a testator’s life or at his/her death. Under this approach, each beneficiary would receive his/her own parcel or piece of the property, thus avoiding the potential conflict caused by the tenants in common approach described above. The advantage to creating a subdivision during the testator’s life is that the testator can ensure that the property is subdivided exactly as he/she desires and can address any issues that may arise during the subdivision process. If the subdivision is only to occur at the time of the testator’s death, it is recommended that the testator have a subdivision plan or survey attached to his/her Will to ensure the accuracy of the subdivided parcels. That said, because subdivision and land development ordinances do change over time, there may be unforeseen issues with a subdivision after death. Further, if a subdivision is to take place after death, the testator should provide in his/her Will how the costs of the subdivision and how any adverse tax consequence (e.g. rollback taxes) are to be paid.
The fourth option is to place the property in a Trust. A Trust can be funded with the property either during the testator’s life or at death. In addition, the testator can set forth in the Trust how the property is to be managed, including any rules, regulations or restrictions, which is advantageous to a testator seeking to control and maintain the property for the future. If a testator does decide to use this approach and place the property in a Trust, it is important also to provide sufficient funds in the Trust for the maintenance, taxes and governance of the property. If the property is placed in a Trust, the testator also needs to decide who is going to act as the trustee(s).
The fifth and final option is that a testator could form a Limited Liability Company or a Family Limited Partnership during his/her lifetime and place the property in that entity either before death or at death. In many ways, this option resembles the “Trust” option discussed above. However, under this approach, a testator should take some time up front to consider whether the entity will have the ability to transfer, sell, etc. the property as well as any tax consequences that may result from such a transfer.
With respect to any of the options outlined above, the key is for the testator to clearly and openly express his/her thoughts, concerns and goals related to the property with a qualified estate planning attorney so that the best option can be chosen for the particular situation.