New England Forestry Consultants, Inc.
P.O. Box 370
61 Penacook Road
North Sutton, NH  03260
Volume 7, No. 1 Winter 2005-2006


If you have been a regular reader of the NEFCo newsletter, you are probably starting to conclude that I have a morbid fascination with death.  In the winter 2001-02 NEFCo newsletter, I made the guarantee that at some point in the future, you would die.  In the winter 2003-04 NEFCo newsletter that guarantee was repeated.  Well, once again it is time to face up to your own mortality.  While I do not find the subject of death to be particularly appealing, it is a subject that is continually on my mind when it comes to estate planning.  Nobody wants to address it, but if you don't, the repercussions could be catastrophic to your family and to the very things that you worked so hard to achieve in your lifetime. 

Estate planning means looking to the future and planning appropriately to insure that there are no surprises.  You can either ignore the need to plan for your estate and possibly provide your heirs with some very unpleasant tax surprises, or you can face the situation "head on" and insure a smooth transition of your estate.  I have yet to meet a client who owns and manages his/her land for the expressed purpose of giving it to the government in estate taxes; therefore, it is logical to conclude that the majority of landowners would like to insure that their heirs benefit from their diligent land management.

Previous newsletters discussed various land management tools.  The winter 2001-02 issue discussed conservation easements, and the winter 2003-04 issue discussed the living trust, otherwise known as the A/B trust.  Both of these tools can be used in your estate planning process.  Two other available tools are Family Partnerships and Limited Liability Companies.

Family Partnerships

A partnership is created when two or more people engage in doing business together without incorporating.  This process may occur informally with a handshake, or formally, through the formation of a partnership agreement.  For the purposes of estate planning, a partnership based on a handshake is doomed to failure.  A written partnership agreement is a must for the survival and effectiveness of a family partnership. 

A partnership can own property and conduct business.  However, a partnership does not need to be an equal partnership.  Some partners can have greater rights, interests, and liabilities than others.

Essentially there are two types of partners in a family partnership.  The first is the general partner(s) who are the decision makers.  The second are the limited partner(s) who have only a beneficial interest in the partnership.  Limited partners share in the profit and losses of the partnership, but have no say in the day-to-day operation.

The formation of a family partnership that owns land allows parents to give their children (or others) a beneficial interest in the property without making an outright gift of a specific tract of land.

IRS regulations allow a taxpayer to make annual tax-exempt gifts of up to $10,000 per individual to an unlimited number of people.  Therefore, a married couple could give up to $20,000 annually to an individual.  This $10,000 annual amount is not limited to cash, but instead a parent could give $10,000 of partnership value to a child. 

In order to understand how a family partnership could benefit your estate planning, it is important to recognize the ultimate goals: to reduce your personal estate to an amount not subject to the "death tax", and to continue your land management legacy.  I will address the land management legacy later in this article, but for right now let me address the estate value issue.

One of the primary reasons that landowners do not plan the disposition of their estates is because they believe it will require them to give up control of their assets.  They have worked hard to accumulate these assets, and the concept of losing control of them is not acceptable.  The family partnership allows the person to maintain control while also reducing his/her estate value.  Remember, a family partnership is not a democracy.  Decisions are made by the general partner(s), and it is not subject to a vote.  Therefore, a landowner can reduce his/her estate value by giving interest in the partnership to his/her children (up to $10,000 per person per year) and maintain control by being a general partner.  Additionally, if limitations are attached to the interest in the partnership, i.e. limiting who can purchase the interest in the partnership, etc., the gift value can be discounted.  For example, a limitation may be placed on the interest in the partnership that reduces the value to $8,000 rather than the $10,000 limit.  This reduction in value would mean that the parent could give $12,000 interest in the partnership, which would be considered only a $10,000 gift by the IRS.

Thus, reducing the estate value is the easy part, and establishing the partnership is relatively simple as well.  Partners simply have an attorney draw up a partnership agreement.  The hard part is determining the content of the partnership agreement and the decisions that must be made.

For example, you decide to form a family partnership.  Your thinking the hard part is over because you have decided to face the reality that you will die.  Sorry, but that decision was the easy part.  Now, you must set the stipulations of the partnership agreement.

The partnership agreement defines why the partnership was formed and how it will make decisions in the future.  You must be very clear in your directives about the decision making process for the future.  This process will have a direct affect on your land management legacy.  If you state that wildlife habitat is the primary purpose of the land management, which wildlife?  How do the future general partners know whether the property should be managed for early successional species that would entail patch clearcuts, or for mature forest species that would require the formation of old growth forests?  The establishment of an adequate partnership agreement requires a fine balancing act.  You must be clear enough to insure the land is managed for its intended purpose, but also allow the future general managers the flexibility to adapt to changes in land management theories and practices.

Once you define the purpose and reason for the formation of the partnership, then you must make the difficult decision of designating who will be the general partner(s) after you step out of that position.  This decision can involve a very difficult process because it will require you to honestly evaluate the strengths and weaknesses of the pool of potential general partners, i.e. your children or other relatives.  Pick a person who is willing to execute the terms of the partnership agreement while treating other partners fairly.  A successful family partnership is completely in the hands of the general partner.  Careful consideration must be given on how future general partners are selected.

Limited Liability Companies (LLC)

A Limited Liability Company (LLC) works much like a corporation, in that the partners avoid some of the liability for the debts of the partnership; however, it is different in that the LLC structure requires that at least two of the four conditions of a corporation are not true.  These conditions are:

1.  Limited liability for the owners.

2.  Centralized management.

3.  No restrictions on ownership interests.

4.  Continuity of existence.

For most LLCs set up to hold family lands, conditions 3 and 4 will not be true.  Most family land LLCs will want to have limited liability for the owners (condition 1) and have a centralized manager(s) (condition 2).  Therefore, in order to meet the LLC requirements, the LLC needs to have restrictions on ownership, i.e. only family members, and must have a finite existence.

Like a family partnership, a partnership agreement must be drawn up.  In the case of an LLC, this document is called an Operating Agreement.  It sets forth in detail the conditions of the company, the purpose of the LLC, and a membership role with conditions for membership.  The Operating Agreement is a private document of the LLC, and every member should have one.  Additionally, the founder of the LLC must file Articles of Organization, usually with the Secretary of State.  This process is a relatively simple process and inexpensive. 

Like the family partnership, once the LLC is established, parents can vest children shares in the LLC up to the maximum annual gift limit without paying a gift tax. Doing so allows the parents to reduce their estate value while maintaining control of the asset.

In most cases, the founder of the LLC will be the manager.  However, unlike the family partnership, the manager of the LLC can be a non-vested individual or company.  For example, it is practical for a timberland LLC to be managed by a forestry consulting firm.  This option essentially allows the parents to avoid having to evaluate their children and select a general manager.  The manager of the LLC must follow the stipulations of the Operating Agreement that should contain the forest management plan of the property.

Differences Between the Family Partnership and the LLC

The primary differences between the Family Partnership and the LLC are liability and taxes.  In a Family Partnership, all partners are liable for the decisions of the partnership.  Profits are distributed directly to the individual partners; however, all debts are also the responsibility of the individuals.  In the LLC, the LLC itself is liable for the decisions of the manager.  Essentially, the LLC is considered a separate entity.  It is a taxpayer without a body; therefore, the individual members are not individually liable for the actions of the LLC.

As far as taxes are concerned, the advantage lies with the Family Partnership.  Because profits are passed directly to the individual and their personal tax returns, the profits are taxed only once.  The news is not as good for the LLC.  Because the LLC is a separate entity, it is taxed as such.  The profits that are paid out to the members are taxed a second time on the member's individual tax return. (see a further clarification below.)

When choosing which option is best for you, carefully consider which advantage is most important, the liability protection or avoiding double taxation.


The Family Partnership and the Limited Liability Company are both practical options when planning your estate.  Both alternatives allow you to lessen your estate value in order to avoid the "death tax", and continue to maintain control of the asset.  They also allow you to insure that your monetary and sweat investments do not go to waste.  Also, allowing your children the opportunity to acquire a vested interest in your woodlands, over a period of time, will cause them to develop an interest in the management and long-term care of the asset.  It will encourage your heirs to continue the land management tradition you started, rather than selling the asset due to lack of interest or estate taxes.  For more information pertaining to your estate planning needs, please feel free to contact your nearest NEFCo forester.

Tony Lamberton, Manchester Center Manager


Since the writing of this article, I have received two messages from readers disputing the above-mentioned information.  This has resulted in me doing additional research and speaking directly to the IRS.  I must concur (sort of) with the readers.

Factually, the above statement (highlighted in orange) is correct, but it is not the complete story.  According to my additional research, as well as my conversations with the IRS, a Limited Liability Corporation may be taxed like a partnership (i.e. no double taxation) or like a corporation (i.e. double taxation).  Here is the rest of the story.

For federal tax purposes, an LLC has to have a classification, with the exception of a single person LLC which receives no classification.  Also please understand, this information pertains to federal taxes and not state taxes.  States may have their own separate laws concerning LLC taxation.

A single person LLC is considered as a non-entity.  The LLC does not pay taxes on income, as the single person will declare income on his/her personal income taxes.

A multi-person LLC will either be classified as a partnership or a corporation.  Tax treatment for each respective classification is different.  For the partnership classification, there is no double taxation.  The LLC is not subject to federal income taxes; however, the individual owners are subject to federal income taxes on the income they earn.  They are also subject to social security taxes and medicare taxes (this is called the "self-employment tax").  Additional concerns with the partnership classification have to do with "disguised sales" and distribution of contributed property; however, this is quite complicated and is beyond the scope of the NEFCo newsletter.

If an LLC is classified as a corporation for tax purposes, the LLC is subject to federal income taxes and the income generated to the owners is also subject to federal income taxes (i.e. double taxation).  The LLC would pay a portion of the social security taxes and medicare taxes that, in a partnership classification, would have been paid by the owners.  The owners would also receive a Form W-2 from the LLC at the end of the year.  These expenses are deducted from the bottom line of the LLC and according to my discussions with the IRS, any profits remaining after these expenses would not be subject to social security and medicare taxes.  Therefore, if the LLC has times where it produces a substantial income, there could be a significant amount of tax savings.

A multi-person LLC may chose either tax classification.  The IRS default classification is that of a partnership, and the IRS must be notified if an LLC would prefer the corporation classification.  The best classification is dependent on the specific circumstances as to why the LLC was formed, and the purpose of the LLC.

It is impractical to believe that all of the information that is necessary to make a decision concerning estate planning can be contained in a semi-annual newsletter.  That is not our intent.  It is however, our intent to briefly review various options in order to get the reader to think about his/her estate plan.  With that being said, unquestionably, the original article was deficient.  Additional clarifying information should have been included in the article, and for that I personally apologize.

Tony Lamberton, Manchester Center Manager


[ Page 1 ] [ Page 2 ] [ Page 3 ]

[ NEFCo Newsletter Index ]

- Last updated on 27 March 2006-
New England Forestry Consultants, Inc.
General Information:
Central Office in North Sutton, NH: