This is my first post on BP, so hopefully I'm doing this right.
I've browsed the forums, listened to a ton of podcasts, and have done a lot of research, but I don't have a good answer for this one. I'm looking for creative approaches on BP before going to an attorney and CPA for official advise.
Here's the situation:
My grandma and grandpa owned a lot of farmland in the midwest that is going to their kids (my parents + aunts and uncles) now that they've both passed away. The way my grandparents structured everything in the will was to put half of the land in a Trust when my grandpa passed away ~15 years ago, and then to give the other half to their kids when my grandma passed away (recently). This means that half the land gets a step-up in basis at the recent passing of my grandma, but the other half has been sitting in a Trust for over a decade. All 9 kids are very close siblings and are fairly well-to-do, but they don't want to pay 6-figures+ in taxes if there are legal ways around it.
Some other things to consider:
- In total, there are 9 people to distribute the land between.
- One of the 9 siblings still farms, and intends to do so for ~six more years. The other 8 siblings are fine with him farming all of this land and renting it to him until he retires, at which point they would sell the land.
- Since the farmer sibling lives very close to the land and farms it himself, any portion he owns is considered an agricultural investment and property taxes are ~1/2 the normal cost of property taxes.
- Allocate a portion of the land to each sibling and dissolve the Trust
- Each sibling can 1031 the land into a desirable rental property near where they live (if they want to)
- At some point in the future (5-10 years?), sell their primary house and move into the rental
- (Checking question: Is this legal?)
The tricky part here is that the farming sibling can't afford to buy out all the other siblings, so we'd like a tax-advantaged way to minimize property taxes during this time (~6 years).
Any recommendations you have would be great to hear! I'll research anything new that comes up as a result of this discussion and will consolidate my thoughts to present to my relatives. From there, they can take it to an attorney and CPA to get official advice.
First I am sorry for your loss.
You need to have an understanding of the trust agreement and what it says. The trust agreement dictates distribution of assets, trust termination, etc. without reading it, sounds like half the land went into a credit shelter trust, hence no step up in basis in death of your grandma. I recommend getting an attorney and CPA involved - both must understand trust and estate tax planning and compliance.
@Luke Hafstad , Great thought from @Lance Lvovsky . From the 1031 perspective the plan between steps 2 and 3 is perfectly fine. Sell this land, 1031 into nice rentals and use for investment for a while and then move into them while selling their old primary residences and taking that profit tax free - Good plan!
The siblings can take a note from the farmer if he doesn’t have the cash. If he can never pay it back siblings can foreclose as an option. Just kicking the can down the road.
The trust type and direction is very important as @Lance Lvovsky discussed.
Get help, identify each persons goals, and develop a plan. Lots of options.
Thank you, everyone!
I'll dig into the trust agreement and see what the stipulations are.
Thanks for the great feedback!!