Transfer of property

[sdarave]

A client who holds substantial property used exclusively for raising cattle has been an unofficial partner with his son who lives with him. This evolved over time as the son grew up on the ranch and has never known anything but the ranch income. The son files his own taxes using schedule C. Title to the property is held jointly with client's spouse. Due to advancing age and illness they are now concerned about the best way to transfer the ranch property to the son. Other heirs are being taken care of separately, so there are no issues with transferring the property to the "partner" son. I feel it would be better to transfer the property prior to the death of the client and spouse, versus inheriting. I am only able to give tax advice so I'm being very careful to not offer legal advice. Any ideas and advice greatly appreciated!

[Lion]

Inheriting would give the son a stepped up basis and long term status. If parents gift to the son, they have gift tax returns to file. Do the parents have other income to live off of after they give away their farm? You need to know what your clients are trying to accomplish; then you can tell them the tax implications of their various options. Because estate planning, state law, and even disgruntled siblings can come into play, do advise your client to seek legal advise, also, such as a good estate lawyer or elder care lawyer or...

[Uncle Sam]

How can the father be an "unofficial partner" if the son files a Schedule C?
Does the son pay rent to the father (and mother) for use of the land?

[Lion]

Do the parents issue the son Form 1099-MISC/NEC for his services to the farm? Why isn't he an employee receiving a W-2? Do the parents File Schedule F?

Why do you feel it would be better to transfer the property prior to the death of your client and spouse? Is the son in a position to purchase the farm from his parents, perhaps on an installment sale, to provide his parents income now or over time?

Again, what are the parents trying to accomplish? Then, you can help them with options to accomplish that, at least the tax consequences to your clients of accomplishing that.

[TAXNJ]

Consider LION’s first reply post to have client seek counsel of a Tax Attorney (and work with the attorney) unless you are qualified and experienced to answer and recommend to the client “various” options from a federal and state perspective.

[ATSMAN]

Is the Father (owner of the property) filing schedule F?

In my neck of the woods we have a lot of family farms where the "kids" independently raise crops or cut wood etc. and sell them on their own. They are suppose to pay rent for the use of the property but you know how it goes with farming families. I wonder if this is a similar situation.

[Burke]

It sounds as though the father/mother own the property in their names (stated in OP) and the son is reporting all the income/expenses (not clear.) This needs to be rectified somehow, and I agree with the advice to consult an eldercare attorney to explore all the ramifications of "transfer" and how it would affect inheritance/Medicaid laws in the state in which the property is located. Transferring while the parents are living will involve a gift situation and a gift tax return even if no tax is due. That point is tax law and not legal advice. Even though the farm/ranch is used "exclusively for raising cattle," it is not clear if the parents live on the property which makes at least a portion of it their principal residence if that is the case. An eldercare attorney in the state in which they live will know all the ins-and-outs of property transfers. This may likely involve changing their will(s) as the same time. These issues would fall under legal advice, and should certainly be reviewed by a competent lawyer who deals in these matters.

[sdarave]

Thanks to all for your input! As a matter of clarification, the family home is located on ranch property. Both parents and the son live in that home. Other siblings are going to inherit other property, only one son wants the ranch. An attorney has advised them against any form of trust and instead recommends forming and LLC. If the ranch and all its property is put into an LLC, would that not continue to exist when members pass away? Interesting.....

[Lion]

You probably don't want to mix personal residence with ranch as a business in an LLC. And, who's going to own the LLC? Again, if son inherits, he gets stepped up basis which will help with depreciation. If parents gift him an interest in the LLC, he receives their current adjusted cost basis and continues, within the LLC, the same depreciation schedule. Now you have a partnership return, K-1s to their Joint 1040 and his Single 1040. You'll make some extra money on the extra tax return. The attorney probably makes the most money on forming the LLC and creating a partnership agreement. If they go that route, make sure the partnership agreement spells out what happens if the parents want to retire, die, any one of them wants out, or anyone wants anyone else out. How is capital and profit and loss split? If they are already acting like a partnership, it might be a good idea to formalize it. What are they trying to accomplish? Then you can tell them the tax implications, and your fees, for filing in that and various ways.

[Burke]

You probably don't want to mix personal residence with ranch as a business in an LLC. And, who's going to own the LLC? .

I agree. Is it their intention for the son to inherit the ranch and the home? Putting only the ranch in an LLC would involve partitioning (i.e., new deeds) the personal residence with an appropriate lot/land acreage from the cattle ranch. Then only the ranching operation with its land would be in the LLC. A personal residence has its own protections under current laws. And as I mentioned earlier structuring this would probably also involve making new wills. If the LLC has 3 members, and two of them die, then it would still remain an LLC, but be a disregarded entity for tax purposes for the remaining one, IMO, and a partnership return would no longer be filed. Does anyone disagree?

[DoubleO]

I agree. Is it their intention for the son to inherit the ranch and the home? Putting only the ranch in an LLC would involve partitioning (i.e., new deeds) the personal residence with an appropriate lot/land acreage from the cattle ranch. Then only the ranching operation with its land would be in the LLC. A personal residence has its own protections under current laws. And as I mentioned earlier structuring this would probably also involve making new wills. If the LLC has 3 members, and two of them die, then it would still remain an LLC, but be a disregarded entity for tax purposes for the remaining one, IMO, and a partnership return would no longer be filed. Does anyone disagree?

Why would the interests of the LLC of the two deceased members not become a part of their estates? Would the remaining member not have to deal with successor issues and what the LLC agreement says about the death of one, two or all three members? I'm not "disagreeing" with you, but am posting a legitimate question for me.

[Burke]

Good point and that could happen. It would depend on the partnership agreement governing a multiple member LLC as you and others have mentioned, and at the very least, on the wills of the deceased members in the absence of any such agreement.