If Mom and Dad don't discuss this with the kids, however, it can backfire. According to Bentz, there have been cases where kids have found out about the easement only after their parents died, and they later challenged it in court. "The kids have already spent the money and they are lawyered up," he says.
In any case, Watson cautions that this tool is not available to everybody because land trusts have their own priorities for what type of land they want to preserve. While they will not own the land, he says, it is their responsibility to make sure the landowner complies with the terms of the easement-something that has costs associated with it. Those costs skyrocket, of course, if the land trust is forced to defend the easement in court.
Another key tool, which can be used in combination with a conservation easement or by itself, is an LLC formed for family members to own the land jointly. The members own shares representing minority interests in the company, which owns the land. Because the shares are so restrictive, they can be worth 30% to 40% less than the liquidation value of the underlying assets, says Paul Lusby, partner at Horn & Lusby LLC in Glendale, Calif.
"That's real economics," he says. "In the marketplace, willing buyer and willing seller, nobody's going to pay you a pro rata share of the liquidation value of the asset so they can liquidate it."
An LLC cannot be formed simply to reduce taxes. There must be a business purpose-for the continuity of management, for generational succession planning, even for the enjoyment of the property by members of the family. One important aspect of this structure is that it can allow family members to move in and out of ownership without having to subdivide the land. And because they now own the land through a company, that company must have a governance code. "It means that families have to set up ways to make decisions and communicate with each other," Sisock says. "It makes you think about those things you don't necessarily think about."
According to Lusby, there are also a host of estate planning tools that work on the principle of present interest and future interest that can apply to a vineyard or another income-producing land. With a grantor retained annuity trust, for example, the parent creates a vehicle to own the land and gifts it to the children at a point in the future but retains the income until that time. The IRS publishes a table specifying the property's discounted present value, which is substantially lower than its current market price, and the parent gifts the property today at that price.
He also points out that an enterprise that is a "qualified family-owned business" can pay a person's estate taxes, normally due nine months after he or she dies, over a period of 10 years. (If the company is sold, the taxes are due right away.)
There's No Such Thing As A Functional Family
But while there are lots of creative ways to pass the property, the heirs often end up selling it because they simply cannot get along. According to Watson, Oregon State University's "heirloom scale" can be a useful tool to help sort out family values. The scale ranges from "1" (the property only has financial value) to "10" (it's all about the property and who the family is). "If one kid is a '1' and the other is a '10,' that's a formula for potential disaster," he says, pointing out that spousal attitudes, though often hidden, also play into the mix.
There are financial tools that allow families to get around any of these issues-if they plan up front. "Certainly there are financial and tax aspects to the timberland planning process," Watson says. "But it's really about the timber and the resource, and who in the family has the knowledge to manage it. And it's about the family history and the attachment to it, and it's about the family dynamic for that particular family.
"You're really passing on more than a financial asset," he says, "and you really need to do the proper planning for it."