I received an email this week that I think might have interest to several of my subscribers so I thought I would post the response. The email follows:
"Please tell me where I can review pros and cons of forming a LLC. I desire the best long term arrangement, tax advantages, etc. for timberland held for a longtime in the family. Need Pros and Cons compared to two siblings holding timberland separately. You might convince me that some, currently owned separately ,should remain that, and other acreage held in common should be split up, or continue to hold in common via a LLC. Thanks for any input you might offer."
Well, for openers, I'm not going to convince you of anything except that the issue is very important and can be complex. On the positive side, I can point you to sources to "review pros and cons of forming a LLC" and other ownership structures.
Breaking down your question a little bit, it looks like both current issues (taxes and management) and estate planning are both concerns (as they should be). So your speculation on an LLC might be right on target (taxes pass through to individuals, limited liability, more than one member but not too many members, etc). But there are caveats.
The best single source for this type of information, that I am aware of, is the National Timber Tax Website. I am going to quote a few things from the site for a general understanding and provide some links for you to pursue the issues in more detail.
First, what is ownership structure?
"Structure" refers to how you set up your timber investment for legal and tax purposes. How should the property be titled? Should you treat it on your tax return as an investment or a business? If you file as a business should it be a sole proprietorship, or should you form a corporation? Whether you are a new timberland owner or someone who has owned the property for a long time, these are just a few of the questions that should be considered when structuring your timber investment...
Timber owners also face a variety of risks that do not affect more conventional investments. Furthermore timber resources are generally exposed to risks for a much longer time period than other forms of investment. Another important consideration is the intergenerational nature of a timber investment. Is the property being held only for speculative purposes, or do you plan to pass the property on? When is it best to start dispersing your wealth? Creating an estate for future generations can be a very complicated process. Read more.
There are a half dozen or so types of ownership structure of which the LLC is one. With the exception of the "C Corporation", all tax related issues flow through to the individuals tax returns meaning no double taxation. That's a good thing. But taxes are not the only issue involved when selecting an ownership structure. Other factors are liability, number of investors, ability to manage, laws of the particular state, cost of organizing, etc. Read a more thorough discussion here.
The National Timber Tax Website also has two publications that deal specifically with estate planning for family owners of timberland. These can be read online or downloaded as PDFs.
Estate Planning Opportunities and Strategies for Private Forest Landowners (by Michael G. Jacobson and John Becker, Penn State)
Estate Planning for Forest Landowners - What Will Become of Your Timberland? (by Haney and Siegel). This also covers the form of timberland ownership and business organization, including LLCs, although it is a little old.
Another site with taxation and estate planning information worth mentioning is the Forest Landowners Guide to Internet Resources. Although it was developed specifically for the Northeast, most of the links apply to any geography. The content is very broad and useful to most any landowner. --Brian
Here is a comment that I received via email. --Brian
ReplyDelete"Please don't overlook the complications created by any joint ownership to the next generation to use the asset as loan collateral or selling a minority interest of the ownership. LLC's, Partnerships, Corp. ect can create problems for any one owner to fully participate in the management decisions that affect capital investment and improvements and timber management intensity and recreational use, control or influence cash flow as individually needed, and ultimately receive full value unless the full entity is liquidated (usually 15%-40% valuation discount for minority interest). Over 2-3 generations, as various minority owner's interests and needs become more diverse, any type of joint ownership can create a "lockup" of a major part of one's assets and prevent full enjoyment of an inheritance. These can also create hard feelings within a family as some will be feel like they are being held hostage to the managing family members and/or valuation discounts if they wanted to sell a minority interest. However, LLC's and Partnerships are a good "spendthrift" strategy for the grantor, if that is the intent.
An LLC Managing Member