Legal Update New Year 2016

A.    Don’t Delay Estate Planning

B.    High or Low Tech Record Keeping

C.    Pipeline Easements – Oil & Gas

D.    The Next Generation / Probate of Farms and Ranches

A. Don’t Delay Estate Planning

It is so easy to wait to do your estate planning until you “really need it”.  I know of two situations in 2015 where men over 80 years of age waited to see a lawyer to prepare a will until they had serious health issues.  Both died within days and never signed their wills, to the detriment of their family members.

While your will is very important, do not forget about encouraging your parents, an elderly uncle, or your children with young ones to get wills and trusts in place.

The best time to plant a tree was last year and the second best time is tomorrow—the same can be said about signing a will and power of attorney.

B. High or Low Tech Record Keeping

Everyone could improve their record keeping system.

At the very least, all adults should have their deeds, financial accounts, bank statements, insurance policies, tax records, brokerage records, and retirement plans in one place in case of a health problem or an untimely death.

In addition, the titles and bills of sale for a person’s car, motorcycle, snowmobile, boats, and ATV need to be organized.  There are also collectibles, antiques, coin collections, guns, tools, and sporting goods scattered throughout homes, garages, and shops.

The old method of manila files, hand written notes, and a filing cabinet still works –as long as a person advises his or her heirs of the location of the same.

For people with access to a scanner and computer, one Saturday of scanning financial records, tax returns, bank statements, titles, etc. and loading those important documents onto a thumb drive or CD can greatly improve organization.  Lists of serial numbers for guns, bikes, guitars, equipment and other sporting goods should also be scanned along with pictures of the item.  Why the pictures? Think of natural disasters (floods or forest fires), an insurance company will be a lot easier to deal with if a claimant has documentation. 

A thumb drive is easy to store in a home safe or safety deposit box.  It is also easy to give a copy to a son or daughter that will handle a person’s affairs upon death or disability.

Even if a person never updates the records, once complete, a trustee or personal representative will have a foundation for determining the assets of an estate.

C. Pipeline Easements – Oil & Gas

Even with the downturn in the oil and gas business due to unusually low oil prices, the oil industry is building numerous pipelines in Eastern Colorado.

The standard easement agreements presented to a landowner usually require substantial modifications to address the unique circumstances of each farmer or rancher.

Nathan L. Andersohn has experience in the oil and gas industry and will negotiate with the pipeline companies on behalf of any landowner.

D. The Next Generation | Probate of Farms and Ranches

Transferring ownership of a family farm or ranch to the next generation results in numerous legal and financial decisions.

An elderly landowner could sell the land and leave the funds to his or her children.  However, paying income taxes on the transaction would substantially reduce the proceeds from the sale of the asset.  The land owner could leave the property to his three children in his Will or Revocable Trust.  The good thing is the heirs’ tax basis for the land would be fair market value on the date of their father’s death.  More than likely the landowner would prefer that his children retain the family farm, which may include water rights, oil, gas and mineral rights, and crop or grazing income.

The following problems could arise anytime there is joint ownership of farm or ranch land: (1) If one child decides he or she needs cash, the child could force the sale of the farm or sell his or her share to a stranger; (2) a child files bankruptcy and the creditors take the bankrupt child’s 1/3 share; (3) should a child get divorced, the child’s 1/3 share could be considered marital property, subjecting it to the claims of the departing spouse; (4) a joint owner is sued and their 1/3 interest becomes subject to a judgment lien; or (5) If a child fails to pay income taxes, their share will be liened by the IRS.

One method to defeat many of the issues listed above is to transfer the farm into a limited liability company (“LLC” or “Company”) and leave each of the three children a 1/3 interest in the LLC.  When the company is created an Operating Agreement or Buy/Sell Agreement restricting ownership, sale, and management of the company should be executed by all of the children (“Members”). The restrictions may include: (1) the assets of the company cannot be liquidated without an 80% vote of the Members; (2) Members are required to be family members; (3) all sales of membership interests are subject to reasonable terms ofpurchase at appraised value; and (4) provisions for transfers to future generations.

A benefit of owning a valuable tract of land in an LLC is that the majority of the children usually elect a Manager of the LLC to centralize the management of the company’s business activities.  In a family owned company with 5­-6 siblings, and in a few decades, 10-15 grandchildren, it is difficult to manage the day to day affairs of an active farming operation, hence the benefit of an elected Manager.  Anyone who has co-owned property and dealt with payment of real estate taxes, crop insurance premiums, 1099’s for crop insurance payments, CRP payments, 1099’s and 1098’s for mortgage interest payments and patronage rebates knows that allocations are often times wrong and if nothing else, very confusing come tax season.

Another benefit of having a Manager is the negotiation of oil & gas leases, easements, and accounting for oil & gas income.  If the widower owns 100%

of his mineral rights and has the potential of long term production of oil, it is possible it would be split between 15-20 individuals after two generations.  If the oil income is the primary income for a ranch it would be beneficial to retain the income in a company account to pay taxes,

insurance and maintenance expenses. If excess income remains after payment of expenses, quarterly or annual distributions could be made to Members.

All of the above would also apply to a family ski condo, fishing cabin, or income-producing commercial property.