Green Horizons

There are problems common to most Missouri forests – invasive species, pests, poor past timber management practices, low timber prices, etc. Likewise, in the world of forestland succession planning, there are also common problems. One that affects most forestland families is how to treat heirs who are not interested in the use and management of the property. In this day and age, it is typical that families have children (or other heirs) that pursue different and varied paths in life. It is not uncommon to have some children that love and cherish the property, and some that are rather indifferent. These children in the later group:

• May not place as much value on the property as you do;
• May not enjoy recreating on the property (hiking, camping, hunting, fishing, working, etc.);
• May not have the skill or knowledge to maintain or manage the timberland;
• May have financial needs/obstacles that make it difficult for them to own an asset that produces little or no income (or worse, costs money from time to time);
• May live far away from the family forestland and cannot participate for reasons of distance.

In situations such as these, it can be tempting to look past these facts, and try to include all heirs equally in the future of the forestland. This could be a big mistake! Forestland is not an asset that lends itself easily to multiple divisions. For instance, a 300-acre farm split into four separate parcels, to be owned separately by each of four children, could create real challenges to managing the resources properly. It also is difficult to divide equally amongst the family – Who gets the barn? The pond? The tillable fields? The road frontage? etc. In the future, if one of those children sells to a developer, it could fundamentally change the integrity of the entire property forever. Alternatively, simply placing the ownership of the entire piece of real estate into the names of multiple children may create legal issues, management disagreements, and family disputes. It can be very, very difficult for adult children (and their spouses) to function as business partners over an extended period of time. When disputes arise in multi-owner situations, it is possible for a dissident sibling/ heir to force a sale/redemption of their interest through the courts. Forced redemptions of even a piece of the timberland could ultimately force the liquidation of the entire property as the heirs struggle to raise the required cash. Obviously, these outcomes thwart the original intent of mom and dad – to preserve the family forest!

A better solution may be to consider concentrating the timberland/ farm assets among those children who are truly interested, and have the ability to be good long term stewards. From a management perspective, this may be a much better situation – the entire property can be managed with a single philosophy, can be done on a larger scale (read lower peracre costs), and with less debate and decision making time. The obvious question is how to treat the other heirs fairly? Here are a couple of common planning techniques used by succession planners:

Asset Matching. Concentrate other family assets into the hands of the “other” heirs. For example, the family home, investment assets, family business (although similar planning concerns are present here as well), life insurance proceeds, etc. This allows the family to match certain types of assets with the most appropriate heirs.

Estate Equalization. Purchase life insurance on one or both parents to provide additional liquid cash at death, to equalize the estate. Often, the value of the timberland passing to one child dwarfs the value of the other assets to be passed to the other heirs. A life insurance policy may provide the additional liquidity to “equalize” the estate. “Second-To-Die” policies, which pay at the second death of two spouses, may be relatively inexpensive and work well in these situations.

Use of a Trust. In some family situations, the intent is to allow all of the heirs to enjoy the property, but also to provide for sound management in the hands of the child who understands timberland issues. In this type of situation, the use of a trust could be considered. Trusts separate the legal ownership of the property (trustee), from the beneficial ownership of the property (beneficiaries). By naming the child with timberland management abilities as the trustee, and naming the other heirs as beneficiaries, the family can better align responsibilities and rights among the heirs. However, this is not without its own challenges. Intra-family disputes can still happen! Beneficiaries who do not see “eye-to-eye” with the trustee can, and will, complain, and can still bring legal actions against the trustee. And, the trustee does then have a legal responsibility to manage the property for the beneficiaries, which can create friction over time (“I do all the work and they just enjoy the property”). In short, trusts may be an effective tool in the right situations.

While there are common problems among forestland families, each family situation is unique. The current owners, along with their succession planning team (attorney, financial advisor, accountant, consulting forester), should consider the specific family circumstances, the owner’s goals, and then weigh the various planning techniques that are commonly used in these types of family situations. By investing the time, and analyzing how different strategies may benefit the family, the forestland stands the best chance of being kept intact for future generations.

David Watson is a financial advisor specializing in working with rural landowners, sportsmen and conservation-minded families. D.A. Watson & Company, 17263 Wild Horse Creek Rd., Suite 202, Chesterfield, MO 63005, 636.230.3900, 888.230.3999

All investing involves risk including the potential loss of principal. Specifically, investing in timberland is subject to substantial price fluctuations of short periods of time and may be affected by unpredictable property and timber valuations and supplies. The market for timberland is widely unregulated and concentrated investing may lead to higher price volatility and there may not be a secondary market available for this product.

Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. This information is not intended to be a substitute for specific individual tax, legal or investment planning advice. Please consult a qualified professional for legal advice/services.

Securities offered through Royal Alliance Associates, Inc., Member FINRA & SIPC. Royal Alliance Associates, Inc. does not offer tax or legal services.

Advisory Services offered through Pines Wealth Management, LLC, a Registered Investment Advisor, not affiliated with Royal Alliance Associates, Inc.

D.A. Watson & Company is not affiliated with nor registered as a broker-dealer or investment advisor with Royal Alliance Associates, Inc.