Green Horizons Newsletter - AgEBB

Green Horizons

Volume 15, Number 1
Winter 2011

Preserving the Family Forest: Create a
Market for Your Timberland
David Watson, Certified Financial Planner

As families work through the process of succession planning for their forestland properties, they encounter the uniqueness of their particular family situation, and the inter-personal dynamics that make their families who they are. These unique characteristics can sometimes become obstacles to the smooth and sustainable transition of forestland ownership that is the ultimate goal. Some timberland families may find themselves in a situation that does not allow the family to simply transfer (via gift, titling or will) the property to an heir. Any one of several factors could be present:

  • There may not be a child who is interested in the forestland;
  • Heirs may not possess the resources to properly manage the property;
  • The current owners (or surviving spouse) may need the income (or capital from sale of the property) to fund retirement or healthcare needs;
  • There may be concern about an unexpected death or disability in the future to the owner/manager.

In these situations, the current owners should be thinking about structuring a sale to a pre-determined party, in advance of the actual sale date. The "buying" party could be a family member, a friend, or a neighbor. In any event, it is a planned, negotiated transfer, at a pre-determined price and time (or set of circumstances). This process is referred to as a "buy-sell" agreement.

Buy-sell agreements are relatively common tools in the succession planning process for privately-held businesses. They do not get as much attention in the forestland succession arena, due to the fact that many families want to pass the farm down to family members, rather than sell it. However, if a sale is necessary (for whatever reason), and the family wants to control who will ultimately own it, a buy-sell agreement is in order. A typical buy-sell agreement contains the following elements:

  • Identity of the seller
  • Identity of the buyer
  • Description of the property in question
  • Description of the future circumstances in which a sale would be "triggered." Generally, these fall into three categories:
    • Lifetime sales (i.e. - at a certain age of the owner)
    • Sale at death of the owner
    • Sale at the disability, or incapacity, of the owner
  • Specified sale price, or the formula/process by which the actual price will be determined

In short, this is a binding legal agreement that solidifies the details of the business transaction, in advance of the actual transfer. For families who will require an eventual sale of the property, but do not wish to face the uncertainty of future ownership in a public sale or auction, a buy-sell agreement is a viable tool to consider. A properly executed buy-sell agreement assures a fair (negotiated) value to the owner’s family, and provides assurance to the buying party that they will receive the property at a future date, under agreeable terms.

In effect, this "creates a market" for the timberland years in advance. Given the uncertainties of real estate markets, economic conditions, and changing family dynamics, this can be a real advantage to forestland families.

Buy-Sell Agreements: Planning Notes

  • If done properly, a buy-sell agreement also will provide a credible valuation of the timberland property to the IRS, for estate tax purposes. Transactions involving family members often come under scrutiny by the IRS as potentially "sham transactions" intended to artificially depress the value of the property for estate valuation purposes (read lower taxes). However, the IRS has provided clear guidance that they will accept a correctly executed buy-sell agreement, as a bona fide "arms length" transaction.
  • Timberland owners should consult and utilize a qualified attorney to draft the buy-sell agreement. These are binding agreements that are intended to guarantee the transference of significant value to both parties. This needs to be done correctly.
  • Often, it makes sense for the buyer to "fund" the agreement with life insurance on the existing owner’s life. This creates a great mechanism for a future owner to help guarantee that they will have the necessary funds to fulfill their obligations under the agreement. In the event of the owner’s death, the death benefit is immediately available to the buyer. And in the event of a lifetime or disability buy-out, the cash value of the contract could be accessed, as well.
  • The agreement could be structured to allow for installment payments over a period of time. This could help the buyer to affordably fund the transaction price by spreading out the obligation over multiple years.
  • "Rights of first refusal" can be incorporated into the agreement (or in a separate ancillary agreement, if preferred by the attorney), to protect the future buyer from unexpected purchase offers from third parties, prior to the "trigger" events in the buy-sell agreement. This can help to create assurances of the ultimate outcome, to both parties.

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

    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 Royal Alliance Associates, Inc., nor registered as a broker-dealer or investment advisor.

    [ Back to Articles ]