A little bit of planning will help in a long way in succession strategies

    Vasili Russis, of Kelleher and Buckley, LLC, was the guest speaker at The Chicago Farmers’ May 13th annual meeting at the Federal Reserve Bank of Chicago. A lawyer and a CPA, Russis related that he has found himself dealing with many litigation cases in recent years when “estate plans go south.” His goal was to help the May audience members avoid these kinds of situations when they are involved in estate planning.

    “In many of the instances, parents gave farmland property outright to their children,” said Russis. “When several surviving children are involved, it only takes one to have a problem.” He noted that the only one who benefits from these disagreements that end up in litigation is the attorney.

    Russis said, “A little bit of planning will help in a long way in passing on property.”

    He noted that there was no established centralization in these inheritance situations. “We look at setting up an LLC (Limited Liability Company) so that there is centralization,” Russis said. “Normally, one person manages the LLC. It could be a family member who best understands farming or someone outside the family who is trustworthy. The family comprises the membership of the LLC. These family members are the investors.”

    Russis said that an agreement as to who should be the manager is needed and it is best to cover this when the parents are alive.

    The benefits of an LLC, which is more effective than a corporation, include:

    • Eliminates partition threat (a sale of the property can’t be forced)
    • Provides litigation protection
    • Allows a key person from the next generation to serve as manager. The patriarch or matriarch could serve in this position until he or she is unable and then a person from the next generation could step in
    • Provides a shield for individuals against creditors; contracts are with the LLC, not with the members of the LLC

    Russis pointed out that the fiduciary duties of the LLC fall upon the manager. It is the manager’s responsibility to ensure that the property is being properly administered, that fair rents are collected, and that the owners are aware that there is a potential buyer for their property. The manager also would ensure that the LLC would file the 1065 tax form in a timely manner.

    “The manager has to be someone you can count on, who is trustworthy and transparent,” said Russis.

    Russis said that setting up an LLC in Illinois has been more attractive in recent years since the state has changed its laws that pertain to this structure. Filing in Illinois is a cost savings rather than having to file in either Nevada or Delaware.

    Regarding asset protection strategies, he noted that a multi-member structure gives protection against outside creditors. “An outside creditor who deals with the farm operation does not have any rights regarding the members of the LLC,” Russis said. “There also are ‘poison pill’ provisions that can be part of the LLC that make the property unattractive to outside creditors.

    He said that trusts can be a good asset protection vehicle. A self-settled trust (which is created by the parents) will not protect parents, but protects future beneficiaries because it becomes an irrevocable trust upon the death of the parents. The trust owns the property.

    A spousal limited access trust also can be established as an asset protection vehicle. The trust involves each parent and it allows them to deed property to an irrevocable trust. The parents are protected from creditors in this trust.

    Russis said another vehicle is the power of appointment support trust (POAST). It is useful when aging family members and younger generations own real estate and there is a low basis property with a high fair trade, which results in capital gains. The property is transferred to an irrevocable trust and the older generation is a beneficiary and given a power of appointment. The transfer of the property to the trust allows for a future step up basis so that the unrealized gain is eliminated on the death of the older generation family member holding the power of appointment and in turn reduces gain in the future due to the step up in basis.

    Russis said that caution has to be taken with the POAST because the current landowner can’t be a beneficiary if it is a newly established trust; however, an added power of appointment in the trust may allow the property to be given back to the landowner.

    Regarding tax deferrals, Russis noted the like kind exchanges, known as 1031s. The 1031 can only be used for real estate, farm equipment is no longer eligible. He said that the property one wishes to buy in this exchange must be identified within 45 days and it must be purchased within 180 days. The basis of the new property carries over to the basis of the relinquished property.

    “It is important to find the replacement property ASAP,” said Russis. “It is possible to do a partial exchange, but there will be a slight tax liability on the gain. Additionally, when the LLC is selling the property, it has to reinvest in the new property. If not all members of the LLC want to reinvest, the LLC must be liquidated and a new one would be formed with the members wishing to buy the property.” For a liquidation, Russis mentioned the liquidation should be planned well in advance of a sale.

    Russis noted that if an LLC does not have the funds to buy out a member, financing could be arranged or the party could be given a promissory note from the LLC.