Family Timberland Partnerships
The purpose of the information provided in this section is to introduce a possibly helpful opportunity. The information is not comprehensive, nor should it be used as legal advice. If you are interested in pursuing a family timberland partnership, discuss it with your attorney and an estate planning advisor.
A family timberland partnership is useful for landowners who wish to involve other family members in their forest enterprise, distribute income tax liability, or reduce the size of their estate.
A word of caution: income and estate tax problems can arise if the senior family members who are the current owners attempt to retain excess control. For the partnership to be legitimate, the gift must be complete. This requirement can be met by retitling the timberland according to applicable state law.
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What is Involved?
In the simplest case, the parents, or senior owners of the timberland, retitle the timberland as a gift to include their children as co-owners. At the same time, a partnership agreement is written and signed by all partners.
At a minimum, the agreement should name a managing partner(s), a tax matters partner, and specify control of access to partnership funds.
The following important considerations must be made in advance:
- can the parents truly afford to make the gift?
- are the parents willing to share control?
- will the other partners be able to handle the financial burden if one partner wants to "cash out"?
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Tax Implications
Family partnership agreements will have some important tax implications:
Gift Tax
When you donate interest in your timberland, it is considered to be a gift that is subject to the annual exclusion tax credit. The annual exclusion is $10,000 per recipient, or $20,000 if spouses make a joint gift. A gift tax would be paid only if the exclusion is exceeded.
Estate Tax
The unified estate credit is the value of your estate that is exempt from taxes. In December 2010, a tax package became law which carried a 35% tax on estates over $5 million ($10 million unified credit per couple). For more about the estate tax, see our Estate Planning page.
Income Tax
The contribution of the timberland to the partnership generally does not result in a taxable gain to the parents. Income from timber sales is distributed to each partner's allocation percentage, as determined by their ownership interest and other contributions. Each partner is liable for the tax on his or her share of the timberland partnership.
Basis Rules
The basis is the original and other costs of an asset. As with all gifts, the basis of the donor is carried over to the recipient, in this case the partnership. This may be a problem if the timberland is highly appreciated at the time the partnership agreement is established because the tax liability on the unrealized gain is spread among the partners.
Built-in Gains
If the parents' basis in the timberland is less than its fair market value when the timberland partnership is established, there is a built-in gain. If some portion of the property is sold within 5 years of the partnership agreement (i.e., timber sales), the gain may be taxable to the parents, rather than distributed among partners. As always, check with your attorney and an estate planning advisor for advice on your specific situation.
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Restrictions and Concluding Remarks
Restrictions
Minors as Partners
If a minor is to benefit from a partnership, a trust or other relationship may have to be established to represent the interests of the minor. It may be possible to overcome this problem by naming the minor as a limited partner.
Retention of Power by the Parents
If the parents retain too much control over the partnership and its income, the status of the partners for tax purposes will be questionable.
Concluding Remarks
The purpose of the information provided in this section is to introduce a possibly helpful opportunity. The information is not comprehensive, nor should it be used as legal advice. If you are interested in pursuing a family timberland partnership, discuss it with your attorney and an estate planning advisor. See our Estate Planning page for more information.