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Trust Law/Level VII · Property and business/7.1 Land/Lesson 7

Farm and ranch succession

How families use trusts, LLCs and partnerships to keep working land together, treat on-farm and off-farm heirs fairly, and handle federal estate tax.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Most farms owe no federal estate tax: the 2026 basic exclusion is $15 million per person, and a surviving spouse keeps the unused amount only through a portability election on Form 706, due 9 months after death.
  2. Where state law allows, a transfer-on-death deed passes land outside probate and still receives a stepped-up income tax basis at death under IRC §1014(b)(9); it must be recorded before death and stays liable for estate debts.
  3. A family LLC or partnership lets parents give interests gradually, up to $19,000 per recipient in 2026 under the annual gift exclusion, while the operating agreement keeps the land whole; larger gifts need Form 709.
  4. For taxable estates, IRC §2032A farm-use valuation can cut value by up to $1,460,000 for 2026 deaths, if the family owned and farmed it 5 of the last 8 years; recapture tax applies if heirs sell or stop farming within 10 years.
  5. IRC §6166 lets an estate whose farm or business exceeds 35% of the adjusted gross estate pay the tax in up to 10 instalments after up to 5 years’ deferral; free extension workbooks cover the family discussions.

MaterialsUniversity of Minnesota Extension’s guide ‘Treatment of heirs in the transfer process’, free onlineOhio State University’s bulletin ‘Strategies for Treating Heirs Equitably’, from the Planning for the Future seriesLesson 7.2.7, on LLCs and operating companies held inside a trust, and lesson 5.1.1, on estate and gift tax

Wonder

  1. How can one child keep farming the land when other children also expect an inheritance?
  2. Is it fair for every heir to receive an equal share of a farm?
  3. How can an estate pay tax when most of its value is land that is still being farmed?

Explore

  1. Many farm and ranch families hold most of their wealth in land, buildings and equipment that the operation needs to keep going. Succession planning deals with two transfers that often happen years apart: ownership of the assets and management of the business. Extension guides describe a common tension: dividing the land equally among all children can break up the operation, while leaving it all to the child who farms can leave the others with little. This lesson explains the tools families use; it does not recommend any of them.
  2. A trust can hold farmland under terms the owner sets: the trustee might lease the land to the farming heir, set rules for selling it, and share income among all the beneficiaries. A revocable trust avoids probate for funded land but gives no protection from the settlor’s creditors, and its assets count in the settlor’s taxable estate. An irrevocable trust can move assets out of the estate, but the settlor generally cannot change it alone.
  3. A family LLC or partnership holds the land itself, and family members hold interests in the company rather than separate parcels. An operating or partnership agreement can set voting rights, limit who may own interests, and include buy-sell terms so that an heir who leaves is paid without dividing the land. LLC members are generally not personally liable for the company’s debts. Interests can be given or sold to the next generation over time, and the interests can themselves be held in a trust (lesson 7.2.7).
  4. Extension specialists often say fair is not always equal. Some families give farm assets to on-farm heirs and other assets, such as savings, investments or life insurance, to off-farm heirs. Others use buy-sell agreements so the farming heir can buy out siblings at an agreed price over time, or credit work that an heir put into building the operation. Each approach depends on accurate valuations and on open family discussion.
  5. Federal estate tax applies only above the basic exclusion, which is $15 million per person in 2026. For larger estates, IRC §2032A lets an executor value qualifying farm real property at its value in farm use rather than fair market value, reducing the value by no more than $1,460,000 for deaths in 2026, with additional tax due if heirs sell to non-family or stop farming within 10 years. IRC §6166 lets an estate in which a closely held business, which can include a farm, exceeds 35% of the adjusted gross estate pay the tax on it in up to 10 annual instalments, the first of which may be deferred for up to 5 years.
  6. Free resources exist. Land-grant universities’ Cooperative Extension services publish farm succession guides and workbooks, such as those from the Universities of Minnesota and Wisconsin and Ohio State University, and some run workshops. The USDA National Agricultural Library lists legal resources on farm transfers, and the Farm Service Agency has loan programmes for beginning farmers who may take over a farm. State laws on trusts, LLCs and farmland vary.

Key facts

  • Farm succession involves passing both ownership of the assets and management of the business, often years apart.
  • A family LLC or partnership lets heirs hold interests in a company that owns the land, rather than separate parcels.
  • Extension guides say fair treatment of on-farm and off-farm heirs need not be equal, and describe buy-sell agreements and non-farm assets for off-farm heirs.
  • The federal estate tax basic exclusion is $15 million per person in 2026.
  • IRC §2032A lets qualifying farm real property be valued at its farm-use value, with the reduction capped at $1,460,000 for deaths in 2026.
  • IRC §6166 lets an estate whose closely held business exceeds 35% of the adjusted gross estate pay the related tax in up to 10 annual instalments after up to 5 years’ deferral.

Exercise nine, six, three, one

9CollectList up to 9 facts about a farm succession described in an extension guide, a case study or this lesson (some sources give fewer), such as who owns the land, who farms it, how many heirs there are, how the land is held and how off-farm heirs are treated.
6ClusterSort them into 6 categories: ownership, management, the heirs, legal structure, tax, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: facts that favour keeping the land together, facts that favour dividing value among heirs, and facts that need more information.
1CrystallizeWrite 1 sentence explaining, in your own words, why fair treatment of farm heirs may not mean equal shares.

Fact check

Dates, figures and claims checked against the published sources listed below.

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