iowa farmland trusts iowa state bar convention west des moines, ia michael duffy, iowa state...

Iowa Farmland Trusts

Iowa State Bar Convention

West Des Moines, IA

Michael Duffy, Iowa State University

Ed Cox, Drake Agricultural

Law Center

June 19, 2013

Objectives• To determine the extent and nature of

farmland ownership by trusts in Iowa• Determine the effects of public policy on the

expansion of ownership by trusts.• Determine the legal obligations of, and

remedies available for, trust parties in relation to the sustainability of trust assets and develop potential state policies that help ensure compliance with fiduciary duties relating to sustainable land management.

Methodology• Internet survey of members of Iowa Trust

Association; – 29 responses; unsure of exact

representation for the survey; 25 had trusts that included Iowa farmland;

• Added questions to the Iowa Farmland Ownership survey; every 5 year survey of Iowa farmland ownership by ISU; telephone survey using 40 acre tract as unit of sample; most answers are as a percent of farmland not people

1982 1992 2002 2007 20120%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Percent of Iowa Farmland in a Trust by Year

Prov

ide

bene

fits fo

r a cha

rity

Prot

ectin

g as

sets

from

cre

dito

rs

Prot

ectin

g as

sets

with

spe

ndth

rift c

laus

es

Avoid

ance

of c

apita

l gai

ns ta

xes

Prev

ent c

hild

ren

from

sel

ling

land

Avoid

ance

of p

roba

te

Plan

ning

for d

eath

or i

ncap

acita

tion

Esta

te ta

x im

plicat

ions

Prov

ide

inco

me

for s

urvi

ving

spo

use

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Average Ranking for Reason People Place Farmland into a Trust, 1 Not Important to 5 Very Imporant

Trustee survey

Revocable Irrevocable Other/DK0%

10%

20%

30%

40%

50%

60%

Distribution of Iowa Farmland in a Trust by Type of Trust, 2012

1 2 - 5 6 - 100%

10%

20%

30%

40%

50%

60%

70%

80%

Number of Owners/Beneficiaries for the Trust

Trustees Owners

Single Couple Two Three Four > 40%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Percent of Farmland in Trusts by Number of Owners

Owner survey

% of Land in a Trust % of Land Not in a Trust0%

10%

20%

30%

40%

50%

60%

Percent of Farmland by Trust Ownership and Gender

Male Female

< 54 55 - 64 65 - 74 > 74 < 54 55 - 64 65 - 74 > 74MALE FEMALE

0%

5%

10%

15%

20%

25%

30%

35%

Percent of Farmland in a Trust or not in a Trust by Age and Gender

% of Land in a Trust % of Land Not in a Trust

Women Men Total0%

10%

20%

30%

40%

50%

60%

70%

80%

Distribution of Farmland in Trust Based on Primary Reason for Owning the Land

Current income Long-term investment Sentimental

Land owner Family Member Attorney Bank Someone Else/DK

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Percentage of Iowa Farmland in a Trust Based on Who is the Trustee, 2012

Surviving spouse's life Children's lives Multiple generations Set number of years0%

10%

20%

30%

40%

50%

60%

Perecent of Trusts by Factor to Determine Life of Trust

Trustee survey

Lifetime of originator Lifetime of beneficiary Lifetime of a class of beneficiaries

More than a generation DK0%

5%

10%

15%

20%

25%

30%

35%

Length of Time for Farmland in Trusts

Owner survey

Cash rent Crop share Custom Owner operated Conservation programs0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percent of Trusts by Type of Tenancy Arrangement

Trustees Owners

Yes No DK/RF0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Are There Provisions for Soil Conservation in the Trusts?

Trustees Owners

Yes No0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Should Soil Conservation or Sustainable Agriculture be Factors in Managing Farmland in a Trust?

Trustee Survey

More

likel

y to

sel

l all

farm

land

More

likel

y to

sel

l som

e fa

rmla

nd

No eff

ect

DK/RF

0%

10%

20%

30%

40%

50%

60%

70%

80%

Distribution of Iowa Farmland Based on Impact of Eliminating or Greatly Reducing Capital Gains Tax

Land in Trust Land not in a Trust

Lower Capital Gains HigherSelling Price Retirement Something else Not planning to sell DK/RF0%

10%

20%

30%

40%

50%

60%

70%

80%

Percent of Iowa Farmland Based on Factor to Prompt Selling Some or All Farmland

Land in Trust Land not in a Trust

Will to family Give to family Sell to family Sell to others Put in trust Other0%

10%

20%

30%

40%

50%

60%

Distribution of Iowa Farmland by Anticipated Method for Distributing Farmland, 2012

1982 1992 2002 2007 2012

Pote

ntia

l tax

sav

ings

Help

keep

farm

land

in fa

mily

Limit

bene

ficia

ries'c

ontro

l ove

r ass

ets

Relie

ve b

urde

n on

oth

ers

Other

reas

on0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Distribution of Iowa Farmland that may go into a Trust Based on the Reason for Considering a Trust,

2012

Observations• The majority of farmland reported to be in

trusts was single owner or owned by a couple

• Tax avoidance and estate planning are the main reasons for using a trust but limiting children’s ability to sell or change and other reasons are noted

• The use of trusts is most prevalent with females and older land owners

Observations• Most trustees are the land owners and

most trusts are revocable• Most trusts are set for only one generation• The increasing use of trusts appears to be

slowing; saturation or 2007 to 2012 land market?

• For most landowners taxes are not the major consideration in whether or not to keep their farmland

Observations• Conservation and sustainable agriculture

practices are almost totally absent from trusts

• Trustees believe soil conservation is a duty• The impact and desirability of having

conservation practices in a trust needs to be researched and discussed

Not a new idea.• “[H]e must be too improvident a man to be a good

farmer, who should invest in the land capital sufficient for high cultivation, without some security ….” — George Wingrove Cooke, Attorney, 1850.

• “The tenant who expects to remain but a short time on a farm has little incentive to conserve and improve the soil .…” — Report of the President’s Committee on Farm Tenancy, February 1937.

• “I’m not going to want to put in hundreds of hours of sweat-equity into soil that I may not have next year.”— Iowa farm tenant, 2001

Land Tenure Significance

There are New CircumstancesDisconnection from the Land• Geographic• Cultural

Symptoms• Leases/Cash Rent?• Trusts?

Next Generation Landowners• Secondary Income• Environmental Concerns

Corresponding Public Policy Historically Focuses on Farm Leases

• Lease Termination Statutes (Iowa Code 562)– Upheld in Benschoter v. Hakes on police

power grounds to prevent soil exploitation and waste.

• Covenant of Good Husbandry.– Implied Covenant referenced in Iowa and a

dissent in Moser v. Thorp Sales Corp. based on protection of soil.

Soil Asset Protection in Private Contracts

• Leases ✔ • Land Contracts• Covenants• Articles• Trusts

A Closer Look at Trusts

• Multiple parties – potentially more than a lease.

• Fractionated interests• Usually, though not exclusively,

managed by a non-operator• Provisions of the document rule.

Public Policy• Nothing specifically addressing land stewardship.• How do legal duties apply to soil assets?

– Survey: 91% of trustees say soil conservation is a factor in executing their fiduciary duties.

– Variations in significance of this factor:• “Soil conservation has a direct relationship to the quality

and value of the asset (farmland) in which the Trustee is to manage.”

• “Only if failure to do so would affect the land in a substantially negative way.”

– How do we measure the economic impact of soil loss?

Trustee’s Duties• Owed to Beneficiaries

– Remaindermen have remedies• Loyalty and Impartiality• Special Skills• Administer as a prudent person

– Determination “focuses primarily on the ‘purposes, terms, and other circumstances of the trust.’” (Heidecker Farms v. Heidecker, 791 N.W.2d 429) (2010)).

• Exercise care, skill and caution in delegation• Duty to Inform and Account• Leases as a record: terms and enforcement of

conservation and husbandry provisions?

Adherence to Trust Provisions• Trustors have the power to direct asset

management to some degree.• Survey shows

• Significance may increase as land passes to non-farming heirs.

Yes No DK/RF0%

20%

40%

60%

80%

100%

Provisions for Soil Conservation

Trustees Owners

Limits on Trust Terms?• May not authorize the trustee to:

– Act in bad faith,– Disregard the purpose of the trust, or– Disregard the interests of the beneficiaries.

• Does this require a balance between stewardship and production?– How much does the express purpose control?

• What about off-farm conservation purposes?

Thank-you

Mike Duffy478 Heady Hall, ISU

Ames, IA 50011mduffy@iastate.edu

Ed CoxDrake Agricultural Law Center

2621 Carpenter AvenueDes Moines, IA 50311

515-271-2205edward.cox@drake.edu