Dividing Land Without Dividing a Family

• KELLY KEARSLEY for the Wall St Journal writes:  
The client had been buying timberland for years. When he reached his mid-60s, the man wanted to gift some of the land to his two daughters and teach them to manage the properties--which generated revenue through timber harvests, leases and hunting permits--in hope the daughters would keep the property in the family.

But he realized that the fate of the property would be in his daughters' hands after his death, so he needed a plan that would address two concerns: Firstly, he worried that even though his daughters got along, they might not agree on what to do with the land after he passed away. Secondly, he wanted to ensure that each benefited equally from the land he gave them, which was tricky given that certain parcels of land had more development value than others.

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"He didn't want them to end up at odds over the timber in the case that one might want to keep the land in the family, and the other might decide they need the money from selling the property," says Rebecca Pavese, a certified public accountant and portfolio manager who works with clients on a range of planning issues for Palisades Hudson Financial Group. The Atlanta firm manages $1.2 billion for 60 clients.

Ms. Pavese and her team relied on their estate-planning expertise to craft a solution that used the two daughters' existing trusts. The plan called for creating two limited partnerships and initially dividing $13 million worth of timberland--about 50% of his holdings--equally between those partnerships. The partnerships were structured identically. A newly created limited liability company, owned 50% by the client and 50% by one of the daughter's trusts, had a 1% interest in the partnership. The remaining 99% of the partnership was split: 50% to the same daughter's trust and 49% to the client.

While the client is alive, each daughter has a controlling interest in her respective properties, which they will co-manage with their father. Once the father dies, however, each daughter will inherit their father's 49% interest in other sibling's property, as well as his half of their LLC.

The result: The daughters end up with a controlling interest of 51% in their own properties, as well as minority ownership (49%) in each other's properties. "It gives them each control so they're never at the mercy of the other," Ms. Pavese says. "But if one sells her property, the other will get an equal economic benefit."

An added bonus: The trusts and the partnership structured provided the client with estate- and gift-tax savings as well, though Ms. Pavese hasn't calculated the exact amount.

Rebecca Pavese

Ms. Pavese spent some time explaining it to the daughters, and once they understood the ownership structure they appreciated the thoughtful approach and the reasoning behind it. And the client was so comfortable with the structure he decided to increase his gift to 70% of his timberlands.

"When you're listening to both the personal and financial issues that are important to a client, you may discover that you can use your technical base to come up with creative solutions," Ms. Pavese says.