These considerations, discussed below, include: (1) whether to divide the agricultural land into separate parcels; (2) whether to qualify for special use valuation deductions; and (3) whether to make a charitable donation of a qualified conservation easement now or at death.
Now let’s examine them.
Subdividing the land into separate parcels for gifting to different children raises both practical and legal questions. The practical questions include whether subdividing the land is feasible given each parcel’s need for irrigation (i.e., is one parcel dependent upon another for its water); access to roads (i.e., is one parcel land-locked); and access to utilities (i.e., how do the parcels get electricity). Also how are the lots’ differing values and the division of mineral rights to be factored into the estate plan?
Then there are the legal questions which include whether the land can be legally subdivided into parcels (i.e., minimum acreage requirements); whether existing encumbrances to the land (i.e., deeds of trusts) will affect the children’s future ability to obtain financing; and whether there are latent contaminations on lots which may become the responsibility of your children to clean-up.
If the family plans to continue the agriculture business, then Section 2032A of the Internal Revenue Code should be considered for estates which may potentially become subject to estate taxes. Currently the federal estate tax exemption allows persons with a net worth under $3.5 million, and married couples under $7 million, to escape estate taxes with proper planning.
Section 2032A allows for substantial valuation discounts for estate taxes. Currently a $1,000,000 reduction in special use (e.g., agriculture) is allowed for farmers, ranchers and vineyard owners to reduce the size of the deceased owner’s estate for federal estate tax purposes.
To qualify, the farmer or rancher must meet numerous requirements (most not discussed here) including the following two: (1) material participation by the farmer/rancher, or his family, in the agricultural activities during five out of the last eight years prior to such owner’s death, disability or retirement (whichever comes first); and (2) transfer of the land at death of owner to family members who likewise themselves must commit to their own material participation for 10 years following the owner’s death. If a surviving spouse inherits the land, then so long as he/she actively manages (not necessarily participates in) the agricultural use before his/her own death, then the test is met.
The material participation may become a thorny issue when the land is rented to others who do the farming or ranching (see IRS Publication 225).
Qualified conservation easements preserve the land for outdoor recreation or education for the public, protect wildlife habitats, preserve open space, or preserve historic land or structures. Charitable income tax or estate tax deductions are allowed for the charitable contribution of the owner’s entire interest; a remainder interest (after death); a perpetual “restriction on land use” to a governmental entity (federal, state or local); or to a qualified charity, such as our local Lake County Land Trust. A “qualified farmer or rancher” is presently allowed an income tax deduction up to his entire adjusted gross income (not including any net operating loss carry backs); anything over that can be carried forward to up to 15 years.
Finally, estate planning for agricultural families, like for other closely held business families, also involves business succession planning. That usually entails “buy-sell” agreements and life-insurance. Furthermore, estate planning for blended families, Medi-Cal planning, and protecting the children’s future inheritances against divorce, creditors and predators may also come into play.
Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 First St., Lakeport. He can be reached by e-mail at
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