Limited Means Limited!
Many farm families have formed family limited partnerships or family limited liability entities over the last several years. These entities are usually formed to help with estate and succession planning. However, they can sometimes lead to disputes as one farm family in South Dakota found out.
In 2002, the Gibson family formed a family limited partnership owning about 2,000 acres. Delores Gibson was the general partner (owning 8.4%) and her two sons Michael and Greg each owned a 45.8% limited partnership interest and the land was farmed jointly by the sons. In 2006, as sometimes happens, the two sons each went their own way and Greg ended up receiving a loan for $350,000 and farming the ground. As you can guess, this did not sit well with Michael, so over several years, multiple lawsuits took place where he alleged the Delores breached her duties in making the loan to Greg and later on selling part of the ground to him for less than “fair market value”. Greg and the partnership had also entered into a 20 year lease.
Michael argued that the partnership should buy him out for equitable value (especially since he was receiving a k1 showing income and no distributions to cover the tax). Last month, the South Dakota Supreme Court finally ruled in favor of the partnership. Even though most outside parties would conclude that Michael may have not been treated “well”, there is nothing in the partnership agreement that was breached by Delores, therefore, Michael is stuck with a 45.8% interest in a family limited partnership that kicks income out to him with no cash.
If Michael had owned 45.8% of the farmland with his brother and mom, he could have demanded a partition (in most states) and received about 1,000 acres to farm or do with as he pleased. However, by putting it in the limited partnership, he has no control or right to the land.
This is one of the main reasons why there is a discount for minority interests when we value family limited entities.
The bottom line is that these entities work great when everyone gets along, not so well when they don’t (but that is true of any family dispute).
Paul Neiffer, CPA