Your Land—Ideas For Titling and Handling Your Estate Plan

Barbed wire fence line
06 Sep 2021

For many of you reading this, you may own all or a portion of the original homestead quarter that was granted to your family well over a hundred years ago. One has to ask, is this just land or is it a family legacy? Land is everywhere but it can be a challenge to acquire. You and your ancestors bought land over time with a lot of hard work, risk taking, and sacrifice. Land is not always readily available and the timing of buying land is not always under your control.  Given its difficulty to acquire, it is often a guarded asset.

An entire book can be written about all aspects of land titling, management, and protection. This article will not be an exhaustive study on the various aspects of land, but instead, will touch on the more common ways we see individuals titling and transferring land via their estate.

Sole Ownership  
Sole ownership is the simplest form of ownership that occurs when just one person owns the land. Ownership and management of land is not shared with another person or entity. In most cases for solely owned land, we are working with a single, divorced or widowed individual. For solely owned land to pass at death, the land will need to go through probate, and you will need a will to direct who inherits the land. In the absence of a will, state law takes over (called Intestate Succession) and your land is distributed to family pursuant to state law—your surviving family members have little or no say in the matter without a will. With no will, for many states, your land goes to your spouse if this is your first marriage. If not, then it gets more complicated. If you are single with no children, the land goes to parents. If parents are deceased and you have no spouse or children, then to siblings or the children of siblings if a sibling has passed away before you. In this case, it is possible that many individuals will co-own the land. Each state differs on Intestate Succession. The best way to deal with land at your death is to have a will or trust set up so you know for sure how the land is ultimately distributed.

Joint Tenancy with Rights of Survivorship (JTWOS)
Under joint tenancy, two or more people own the land with equal ownership. In other words, you co-own the land. Thus, if you owned a section of land as joint tenants you do not own 320 acres. You instead co-own 640 acres. The acres are not individually allocated. For you to own 320 acres, each owner would need to agree to split the land into separate 320-acre parcels that could then be owned as sole ownership. The operative word here is “agree.” Not everyone agrees on how the land should be split.

From an estate planning perspective, one of the major advantages of joint tenancy ownership is that land passes to the other joint owner(s) at death without probate, and further, a will is not needed to direct who inherits jointly-owned land. Title passes to the other joint owner(s) by operation of law. This can be viewed as an advantage - especially for land owned between a married couple or perhaps between a parent(s) and a child. However, if land is owned as joint tenancy between siblings, this can be a distinct disadvantage because joint owners cannot state to whom their share of ownership goes at death. For example, if three siblings owned land as joint tenants, the last of the three to survive will be the sole owner and the families of the previous two owners (now deceased) inherit no ownership in the land. The last person standing “wins” the land! We really try to avoid joint tenancy between siblings and other co-owners other than a married couple or perhaps a child and parent(s). 

To know for sure if your land is owned as joint tenancy, you will need to pull the deed and see if the right language is on the deed. This language is often at the beginning of the deed and will specifically state the land is owned as joint tenancy. If the deed does not say joint tenancy than it is owned as tenants in common (more on this below). If your estate has estate tax risk (which may be the case in Minnesota) joint tenancy may not be a good way to title land. Jointly-owned land means at the first passing of a married couple, all the land will be in the survivor’s name and thus a large portion of the value of the estate will be in the survivor’s name. We may not want that. It may be in the family’s best interest for land ownership to be split so that each spouse owns an individual 50% interest in the land, which allows us to reduce the value of the survivors estate. To accomplish this, another titling strategy may be needed. This is called tenants in common.

Tenants in Common 
Land owned as tenants in common is similar to land owned as joint tenants in that you co-own land with another individual(s). The same example discussed above for the section of land owned by two individuals applies to tenants in common. Acres are not individually allocated. However, this is where the similarities end. First off, the percentage of ownership is in your name alone. For example, if you owned land as tenants in common with another person, you have a 50% ownership in the land. Your ownership is still shared but it will not automatically pass to the other owner at your death. Each owner has a 50% undivided interest in the land. Because of this, you will need a will to transfer your ownership to your heirs (or be subject to Intestate Succession laws). Tenants in common ownership is subject to probate unlike jointly-owned land that passes without probate. With jointly-owned land, the other owners will inherit your share at death, but with tenants in common, your ownership can be left to whomever you chose—it does not automatically go to the other owner(s). And lastly, unlike joint tenancy, tenants in common ownership need not be equal between the owners. 

Often, we see wills set up so that children inherit land as tenants in common (in other words, equally), which can cause problems between siblings. For example, let’s assume both parents are deceased, and they leave six quarters of land to their four children, one of whom farms the land. Let’s further assume the farming heir is 60 years old who has no one taking over the farm. With this many heirs, there is a high probability that someone will want to sell. Under tenants in common, if an owner thinks land should be sold, all four owners must agree to the buyer, the price, and the terms for the sale (cash or contract for deed). If only one does not want to sell, the land won’t sell. It takes all four owners to sign the deed to transfer the land to another owner. One could say, “why can’t I just sell my quarter interest”? You could offer your interest for sale, but if none of the other owners want to buy you out, then you are forced to go into the open market. It is rare that a full market price will be obtained for a quarter interest assuming the partial interest can even be sold. The assumption is often made that the farming sibling will just buy the land. But, at 60 years of age, do they want to buy without a farming heir? Should they buy?

The estate planning application here is that rather than having land go equally into the names of all children, consider whole parcels so that each child owns their own parcel. I will be the first to say this is not always possible with all land, especially where there is mixed topography (water and trees) and a combination of pasture and tillable ground. And, who gets the more valuable land and who gets the one with the 40-acre slough? If you can, consider placing whole parcels into the names of children.

Another estate planning application that is used - especially if whole parcels of land go to both farming and non-farming heirs - is to use a right of refusal or an option in your will so that if heirs want to sell and rent land, they must first offer it for sale to their farming sibling. Often in a right or option there are pricing formulas for how the land is valued if sold that are based on the appraised value. For determining a rental rate consider the use of a third-party data base - such as Extension Service publications, National Agricultural Statistics Service (NASS), and the North Dakota Department of Trust Lands Survey - to determine a fair rent. We have seen some rights and options price the cash rent at the average of the farms rented ground. Regardless, try to avoid fair market value for rental rates. Fair market value has a different interpretation for the farmer and the non-farmer.

Trust Owned Land
There is a huge list of reasons that land is placed into a trust. For the most part, land placed in a trust is done to avoid probate, protect the land, provide a set of instructions for when land may be distributed to heirs, provide terms for buying land, and outline terms for how land may be rented. A revocable trust is a type of trust that can be altered or changed and is typically used to avoid probate. Trust owned assets do not go through the probate process. If you own land or real estate in multiple states and the land and real estate is owned by the trust, then probate is avoided in each state. A revocable trust becomes irrevocable at your death or disability and can be used to state for trust owned land who can rent, at what rental rate, who can buy land and at what price. Distribution of rental income and sale proceeds are governed by language in the trust, which might delay or reduce the distribution to certain heirs based on your wishes and instructions. 

Entity Owned Land
There are many types of entities that can own land. The first question to ask when setting up a land entity is, will this entity make my situation better? If not, then maybe rethink the whole idea of entity owned land. Be sure to know the tax ramifications of entity owned land to be clear about how the land will be taxed when removed from the entity. Land in a corporation is usually taxed on any appreciation if land is simply removed (not sold) from the corporation whereas land in a partnership is usually not taxed on any appreciation. There are a handful of states (Minnesota, North Dakota, South Dakota, and Wisconsin) that have anti-corporate farming laws that bar land from being owned by a corporation or LLC if the land is not farmed by family. This needs to be considered when looking at an entity to own land.

Why a land entity? Most land entities are designed to keep land together and protected, state who can own the entity, and provide a pricing formula for how an individual’s ownership is valued along with buy-out terms (cash or contract). Some entities have different ownership classes that can help ensure that land is kept in the entity with a farming child staying in control of said land entity. In some cases, a land entity will allow some level of valuation discount so there is a way to reduce the overall value of the decedent’s estate reducing either state or federal estate taxes (or maybe both).

Final Thoughts
What is the best way to own land? As you can see from the information above, it depends on your situation, your goals, your family dynamics, if there is farming heir, where your land and real estate are located, and if your estate is taxable. It is important to know the subtle differences with how titling land can change how it is ultimately distributed to your family. Be sure your will or trust do what you want. For this to happen, land should be properly titled. Whether you farm or not, also be sure to know how titling of land impacts how it will ultimately be distributed and what restrictions or complexities there may be in the future with your ability to sell or transfer title. 

 
Russell Tweiten
Written By: Russ Tweiten
VP Succession and Retirement Planning