Don’t make the error of making your children tenants in common

Dear Michael: We recently read your letter regarding how your children should not have joint ownership – either through inheritance or via a life estate. We set up a life estate 10 years ago and now our son is farming. The other three are still on good terms, but we now know that can change upon death. What can we do to make certain our children get along once we are gone and that our farming son can continue to farm if he likes? – Split In Error.

Dear Split in Error: You are right. It is a major error to split property between your children by making them tenants in common. The definition of this ownership is an undivided interest in the property. In other words, four different people own every square inch of your property. All family members to be sure, but now so much further on in life than they were when they were children. When you add that they are married, then the split is now seven or eight different ways.

It is not so much about what you can do, but what the children need to do to maintain family harmony. As you gifted them the deed to the property – while retaining a life estate interest of use and income for your lifetimes – it is now their ownership of this deed they will need to deal with.

As such, they are joint owners, and joint owners are a partnership under state law.

They must all meet and come to terms with how they will handle the split of the property someday in the future when one or two of them want to sell and the others do not. With undivided ownership, the entire farm would have to be sold for each child to receive their one-quarter share of each inch on your property.

The best thing they can do is sit down with the land maps, assign values to each parcel of land you have, and once settling who is to get what, make a division of the remainder interest deed. Now there will be four deeds – still with a life estate to you until death – but they will be able to go their own ways upon your deaths.

I always like agreements that have a balancer option in play. This would state in their agreement the land is to be appraised at the time of death and if anyone’s parcel is valued more than $20,000 more than the other parcel(s), the one with the higher value must pay the one who came up short. With four different parcels there may be money changing hands for all of them.

You do throw a different wrinkle into it as you stated you have a son farming now and you want him to farm if he likes. If the other children are on board with this, then their agreement would have to hold an agreement that the land could not be sold during his farming career. The rent he is paying you, upon your deaths, shall be paid to the non-farming children until he ceases farming. If one forces the issue, then he can buy their share on terms he can afford – such as contract for deed or a lesser value than appraised value. If he does so, he must actively farm for 10 years after the purchase. If he sells the property, then he must give the purchased child’s share back to them if it is over and above what he paid them.

This is all dependent on your son continuing to farm and “actively participating” in farming. The farming son must meet the definition of “active farming.” I have found that the best definition is found in North Dakota’s corporate farming law. Here is that definition:

A farmer must be engaged in farming which is defined as “cultivating land for production of agricultural crops or livestock, or the raising or producing of livestock or livestock products, or fruit or horticultural products. It does not include production of timber or forest products, nor does it include a contract whereby a processor or distributor of farm products or supplies provides grain, harvesting, or other farm services.” (NDCC, Section 10-06.1-01, Subsection 1) The farm corporation may engage in alternate activities; however, the annual average of at least 65 percent of the corporation's gross income over the previous five years shall have been derived from farming or ranching operations. The corporation's income from nonfarm rent, nonfarm royalties, dividends, interest, and annuities cannot exceed 20 percent of the corporation's gross income.

If he meets this definition, he is “actively farming.”

Now, everyone must sign this agreement. Some attorneys might state that not only do your children have to sign, but their spouses, as well. There’s a lot of discussion that goes into this agreement, but you start now while everyone is getting along. Don’t wait.

Call me at my office for your free one-hour consultation.