Reed: Keeping family ranch or farm in the family

Sandra W. Reed
Special to the Reporter

Jack Jones owns a ranch that has been in the family for three generations. Tom Smith owns a farm inherited from his great grandparents. Both Jones and Smith want to the property to remain in the family indefinitely. Can they prevent the sale of the property forever?

Sandra Reed

Using an Irrevocable Trust to Restrict Sale of Family Ranch or Farm

Jack and Tom cannot restrict the sale of the family property forever. However, they can restrict the sale of the family property through the creation of an irrevocable trust into which they transfer that property. The trust can stipulate that the property cannot be sold and, if so desired, that the property continue to be used for ranching or farming.

Length of Time Irrevocable Trust Restricts Sale

The length of time that an irrevocable trust may exist is restricted by the rule of perpetuities. The rule provides that the trust may continue for the period of “lives in being” at the trust’s creation plus 21 years.”

Jack has three sons and four grandchildren but no great grandchildren. Translating the rule of perpetuities into practical terms, Jack can restrict sale of the ranch until 21 years after the last of the three sons and four grandchildren dies.

Tom has two children who are in their fifties and no grandchildren. He can prevent the sale of the farm through the trust he establishes for 21 years after the death of his longest living child. Obviously, Tom will not be able to restrict sale of the farm for as long as Jack can restrict sale of the ranch.

Disadvantage of Transferring Ranch or Farm to Irrevocable Trust

Transferring real estate to an irrevocable trust results in the loss of the stepped-up basis for capital gains tax purposes. Property inherited from an estate receives an increase in the basis to the date of death value, rather than the cost of purchase and improvements. The property in the irrevocable trust does not qualify for that benefit.

In practical terms, if Jack’s basis in the ranch at his death is $500,000, but the current value is $5 million, if passed by his will, the inheritors receive a basis of five million rather than $500,000. If Jack’s basis is $500,000 when he places the property in trust, it retains that basis when sold. If the property is worth $15 million at sale, capital gains tax will be assessed on $14.5 million.

Sandra W. Reed practices Elder Law in Somervell County, handling probating of estates, drafting of wills, trusts, powers of attorney and deeds as well as estate and Medicaid planning.  She lives on beautiful Chalk Mountain and can be reached at 254.797.0211; 817.946.2809 or at sreed@kbzlaw.com.