Creating a Limited Liability Company or Corporation: One family describes their process for leaving a forest legacy

At a recent forestry summit a family described their unique efforts to secure the profitable continuation of their farm and forest operations for subsequent generations. The following are the highlights from that conversation:

What prompted you and your family to take action to secure your forestlands?

We are indebted to previous generations for keeping the land in the family and caring for it in the most conscientious way. Our land came through maternal and paternal sides and dates back to the mid- and late 1700s in two Piedmont counties. We have since purchased lands to consolidate our holdings and created three separate Limited Liability Corporations. Along the way we have sold some development rights and donated conservation easements to secure the property for the future. We share some of the lessons we’ve learned along the way in hopes that others may benefit from our experience and sculpt an enduring future for their lands.

Where did you start your legacy quest?

Every Journey Starts with a 1st Step - Develop a Plan

We benefitted from our fathers’ foresight. Planted pines helped finance our college degrees. We began with a desire to productively place tracts into sustainable management. We enrolled in two “Master Forester” classes during the late 1970s and 1980s. Working with our agent we were advised by Extension specialists in taxes, business, legal options and forest conservation at NC State University. This education was invaluable in helping us describe and pursue our goals for the land. We learned about the importance of engaging a registered forester to work with us. After hiring a consulting forester we have had a wonderful working relationship.

What gems or lessons have you learned that you can share with other landowners?

Our Key Lessons for Success:

• Land needs to be productive to successfully pass to next generation
• Large tracts provide favorable economics – we have been blessed in that department
• Develop a Comprehensive Forestry plan that provides:
  • Manageable units of 30-50 acres which allows for scheduling harvests, replanting, burns and other management practices on a rotating basis
  • Protective steps against loses from drought, high wind damage, ice storms, and fire
  • Periodic timber income
• Adopt a Business Approach to Forest and Land Management
• Use Conservation Tools/ Incentives/Tax relief to protect and keep the properties intact

Please share some of the decision–making that went into selecting an LLC as the structure to hold your lands?

• The LLC is a legal ownership structure that provides a means to keep the tracts undivided.
• The LLC structure provided us liability protection for family members.
• The land belongs to the LLC and not to the members in the traditional acreage sense.
• Ownership is split by shares that can be sold, bought or inherited.
• The LLC is the entity that can enter long-term or perpetual agreements on behalf of its members should they desire to do so.
• The LLC structure was understandable, affordable and met our needs.

How did you establish the LLC?

• Most of the forms (Articles of Organization and the like) were obtained from North Carolina Secretary of State website
• We use a managing member who has the legal ability to sign documents for the farms, set up accounts, receive funds into the LLC accounts from hunt leases, timber harvests and dispense funds from harvests according to each member’s ownership percentage.
• The corporation must have an annual meeting. Members receive update on financials, activities and future plans.
• The managing member will have to initially complete the Secretary of State forms on line and pay the annual fee from the LLC accounts.
• A yearly report with the North Carolina Secretary of State must be filed on its website. Currently there is a $200 fee in March or April per LLC.

How does the money and tax part of an LLC work?

• An LLC is technically considered a partnership for tax purposes. Each member is responsible to pay taxes on his/her share of any proceeds. This includes hunt club lease money (profit), timber harvest proceeds (profit), and hunt insurance (expense) and equipment purchase, repair, depreciations, etc. (expense).
• LLCs that are tree farms or sustainably managed farms can qualify for county present use property tax program.
• Each LLC files a federal tax for 1065 (titled U.S. Return of Partnership Income) with any taxes due paid by the members of each of the LLC’s on his/her personal income tax returns.
• A federal tax form 1065 must also be filed annually for each LLC, even if there is no income.

Are there other incentives or tools you’ve used to protect and conserve your forest property?

• Retained Timber Rights: We found a “work around” for an elderly relative who needed cash flow but was willing to sell us her land. She retained her share of timber harvests until her passing. We paid her for the “dirt” beneath her trees, while she continued to receive her share of timber receipts from multiple harvests. This simple solution spared her from replanting and other costs associated with the forest plan we developed. And we were able to secure the family land early on and not have to risk its loss by sale at her passing, so it was a “win-win” for us all.

We also used two types of agreements to secure our properties into the future:

• One agreement with the local land trust prohibits commercial development and subdivision of two large tracts in perpetuity. We are encouraged to manage for forestry as long as Best Management Practices (BMP) are utilized.
  • Another Clean Water Management (CWM) agreement covers only 87 acres along all of the creeks of both tracts. The CWM Trust Fund program bought the development rights to protect wetlands and water quality with adequate buffers.
    • Forestry activities are precluded within the marked buffers along the creeks.
    • The buffer of trees and undergrowth must remain intact to protect the water that flows into Big Mountain Creek, a tributary of the PeeDee River.

We leveraged funds received from the sale of development rights to secure additional family lands:

• To consolidate family ownership, partial funding was needed to buy an inherited 50% interest. We “swapped” sale proceeds using the 1031 Like-Kind Exchange process. The process avoids capital gains taxes if “like properties” are purchased with the proceeds. So in a nutshell the sale of development rights funded the consolidation and enlargement of our family lands.
• Also the sale of the development rights was below fair market value so we incurred a donation credit for the difference. We used the Federal tax incentives that accrue from donating a Conservation Easement to realize a significant deduction on our federal income tax for up to 15 years.

Thank you so much for sharing your experience, if individuals would like more information we’ve provided the following links for publications and email contact info:

Publications of Interest:

Conserving Working Lands: A Land Legacy Workbook with Tools and Resources to Guide Your Conservation Planning Journey

Estate Planning for Forest Landowners

If you have additional questions, please send an email to one of the contacts below:

Mark Megalos, Extension Professor, mamegalo@ncsu.edu

Colby Lambert, Area Specialized Forestry Agent, colby_lambert@ncsu.edu

Or ask the landowners directly by clicking this link: Contact