Right to Partition

In some estate plans, parents will leave the farm or ranch to their children equally or to “share and share alike”.  This means each child receives an undivided interest in the real estate.  In other words, if there are three children, each child receives an undivided one-third share of the farm to “share” with the other two children.  The ownership of the farm then, is as tenants in common.

But what if the three owners of the farm cannot, under any circumstances, get along?  Are there any legal methods to dissolve the tenancy in common?  As tenants in common, each tenant possesses a right of Partition.  Partition is the ability to divide property.

A right of partition can either be voluntary or involuntary.  In a voluntary partition, each owner exchanges deeds, with all owners signing each deed, and each deed conveying to owe of the owners a specific parcel of property.

In an involuntary partition, one or more tenants in common petitions the court to divide the property.  The court made divide the property in-kind or by sale.  A partition in kind is when a court will try to physically divide the property between co-owners.  A partition in kind, however, will not occur if “great prejudice” to any of the owners occurs.  Great prejudice occurs when the court compares the amount an owner would receive if the property were divided in kind and then sold versus the amount received if the entire property sold and the proceeds distributed to all owners.  If the amounts are materially different, great prejudice exists.

The Partition article goes into further depth about the partition process and whether the right to partition may be restricted.  As always, if you have any questions, you are welcome to contact us!

Crowdfunding and Taxes

As today is tax day, it seems somewhat appropriate to discuss taxes.  But I want to discuss a little-known tax issue that may become a big issue, either currently or in the future, for some of our readers.

Crowdfunding is a growing funding resource for many farmers and ranchers just starting out.  Crowdfunding is when a person or organization makes a pitch for funding on an Internet platform such as Kickstarter, Barnraiser, or many others (see a comprehensive list here).  The general idea is to have a lot of small donations from your “crowd” to fund a project.

But is there a potential downside?  Yes, from a tax perspective there could be.  According to this New York Times article, IRS rules require companies that process payments for crowdfunding sites to send a 1099-K form to any customer for whom they register 200 annual transactions totaling at least $20,000.

As the Times points out, this a tax issue that could be compounded by timing.  If the crowdfunding occurs in a year with little to no business expenses to offset the generated income, there could be a greater than anticipated tax bill due.

But there is also the state tax angle, more specifically, sales tax.  Sales tax varies state-to-state and, in some cases, situation to situation.  Generally speaking, however, sales tax is due for anything sold to an in-state buyer.  Sales tax is applicable regardless of the number of donors or amount raised.

In sum?  Crowdfunding may be a wonderful opportunity for your farm.  But be aware of the potential tax implications before jumping straight into a fundraiser.

Charitable Giving in Succession Planning

We recently posted a series of articles on estate and succession planning.  We are going to highlight a few throughout the next few months through blog posts and today, we start with charitable giving.

Charitable giving is a portion of many estate plans, for many reasons.  For some, the sole purpose is charitable while for others, there may be both a charitable purposes and advantageous tax treatment.

For estate planning purposes, any amount given to a qualified charity is deductible.  Thus, a person with a $10 million estate could transfer $5.43 million to his or her heirs and the remainder to charity, thus avoiding the payment of estate taxes.  The charitable deduction for estate tax purposes is unlimited.

The charitable deduction for income tax purposes, however, is not unlimited.  Various rules apply and it is best to consult with your accountant to explore the scenarios.  This blog post is merely to discuss some of the legal rules and encourage you to read the entire charitable giving article!

Generally, (and again, speak with your accountant), the limitations depend upon: (1) whether the giving is to a public or private charity, (2) the type of property being given, and (3) whether or not the donor is an individual or corporation.  Again, generally, an individual may take a charitable deduction for income tax purposes of up to 50% of the donor’s adjusted gross income.

To determine if your selected charity is an eligible recipient, the IRS maintains a list.  There are some other requirements, found in Section 2055 of the Internal Revenue Code, but generally, if your charitable contribution is to a political entity (e.g. United States, a state, political subdivision), non-profit (including fraternal societies, orders, and lodge system), or veterans’ organization incorporated by Act of Congress, the charitable gift is to an eligible entity.

Charitable gifts may be outright, such as a contribution to an alumni fund or the collection plate at church, or a partial interest in property, such as retaining a life estate in donated agricultural land.  If you wish to retain a partial interest in the property, you will need to explore more sophisticated planning options such as charitable lead trusts, charitable remainder trusts, gift annuities, and in certain instances for farm land and residences, a life estate.

We encourage you to read the Charitable Giving article and contact us if you have any questions!