Q: My parents own a farm and they want to start gifting it to my siblings and I. What is the best way for them to do that?
A: The gifting of real estate can be complicated. Before gifting interests in land, a person should sit down with an adviser to understand the risks and to come up with a game plan.
The easiest way to make a gift of land is to simply record a deed conveying an interest in the land. However, whenever you start creating small or minority interests in land, issues can arise. For example, do you really want to own 80 percent of the interest in land and have four other people each own 5 percent?
What if one of those people who owns 5 percent would rather have cash than the land? Can you say partition suit? How you would you feel about having to buy back the 5 percent of the land you just gifted?
When making gifts of small interests in land, I usually prefer to use some sort of entity to facilitate the transfer.
Land trusts are one good option convey small interests in land. A land trust is a simple of trust used to hold legal title to land. The cool thing about using a land trust is that you can convey interests in the trust rather than a present interest in the land. You can give away 5 percent of the trust without affecting title to the land.
Another option is to use a corporation or a limited liability company, or LLC. After creating the corporate entity, you can transfer title of the land to the company. Then if you want to gift interests in the property, you can gift shares of stock in the case of a corporation or membership interests in the LLC. Again you can make a gift without actually affecting the title to the land.
Another benefit of using an entity to make gifts is that you can include things other than just the land. If your parents own an operating farm, they likely own equipment that makes farming possible. I don’t pretend to be an expert on farm operations, but I assume an operating farm owns tractors and other types of equipment. Ownership of the equipment can be transferred to the entity. Thus, you can include interests in the equipment with the gift.
However the gift is made, there are a couple of things to keep in mind. For 2013, a person can make gifts to anyone individual in the amount of $14,000 without having to file a federal gift tax return. In addition, the current lifetime gift for 2013 is $5,250,000. So if $14,000 isn’t enough, they can make larger gifts and file a gift tax return, elect to use a portion of their lifetime exclusion and not have to pay any tax.
owever, just keep in mind that gifting interests in land can get complicated, so make sure you talk to some in the know.