The basis for Agricultural law is rooted in land. Whether the land is owned outright or leased it is a necessity for any agricultural based business. When land is purchased for agricultural purposes a decision must be made regarding how the real property is to be owned. Is it to be held by the individuals as joint tenants or as tenants in common. Generally, joint tenancy provides for the automatic transfer of land to surviving joint tenant(s) upon the death of one of the joint tenants. Tenants in common does not automatically transfer on the death of one tenant and therefore will be governed by that tenants estate planning documents.

If land is purchased under a financing arrangement a determination must be made whether the financing document is a contract for deed, mortgage or trust indenture. A contract for deed leaves ownership in the name of the seller until the full purchase price is paid. A mortgage and trust indenture transfer ownership to the buyer and a lien is placed on the property until the full purchase price is paid. If the buyer defaults under a contract for deed the seller simply cancels the contract and files a deed in their name clearing title to the property. If the buyer defaults under a mortgage or trust indenture the Seller can foreclose on the lien and have the property vested back in their name. A mortgage will give the buyer the right to redeem the property for a certain period of time and under a trust indenture the buyer has no right of redemption. Typically the seller will resell the property under a mortgage and if there are not enough proceeds to cover the debt, the seller has the right to collect the difference, a deficiency, from the buyer. The seller does not have this right under a trust indenture.

Associated with land are title issues such as previous liens, easements, zoning restrictions and water rights. A previous lien may be held by a third party which will cloud the title to the land in question. It is important that a title report and title insurance be obtained prior to any land transfer. The report will list the previous liens held against the property so that a buyer will know the status of ownership in the land. The title insurance will protect the buyer from any defects in the title to the land and is typically issued by a title company. The title report may also list any easements on the land. An easement is right by another person to use the land for a certain purpose such as running power lines across the property or the right to drive across the property. Again, it is important to be informed of these things before land is purchased. A title report will not discuss any zoning restrictions or water rights. A buyer must independently determine if there are any zoning restrictions on the land preventing them from using the land for a certain purpose. For example, land may be zoned for residential use only and a building permit would not be issued to construct a commercial building on the same property. The buyer must also determine if there are any water rights associated with the land. Water rights in Montana are governed by the Montana Department of Natural Resources. They will issue a report as to what rights the buyer has in any water associated with the land and will control what the water may be used for.

Specific information concerning real estate can be found by using the following link Real Property to connect to a different part of our web site.

Once it has been determined what land is going to be used for the agricultural operation and the associated rights and limitations of that use it must be determined what type of business structure is going to be used. The easiest structure to use is known as a sole proprietorship. This means that there is no entity in place other than the farmer or rancher working under their own name in the business. The operator must consider for purposes of legal liability, taxation and transfer to the next generation whether an entity would be proper. The operator can generally choose from a corporation, limited liability company, limited partnership or a general partnership. All of these entities are recognized as separate from the operators for legal purposes and taxation. A corporation will have shareholders and can either pay taxes on its own behalf or have the income flow through to the business owners and taxed at their level. The shareholders generally are not subject to liability’s of the corporation. A limited liability company has member owners and partnership has partners. Both are flow through entities and all income is taxed at the owner level. The limited partnership has both general and limited partners which are both taxed at their level. The members of a limited liability company and limited partners of a limited partnership are not personally subject to liabilities of the entities. General partners, however, are subject to personal liability for debts of the entity. Care must be taken in choosing the right entity to meet the needs of the agricultural operator. Additional information regarding business planning can be found by using the following link Business Planning to connect to a different part of our web site.

Unfortunately, agricultural operators will face downturns in their business. Weather in Montana will play a large factor in the success of a farm or ranch and unfortunately the saying, “Tired of the weather in Montana, wait 5 minutes” holds true. If the operator is financing their operation they may be faced with an agricultural workout or a bankruptcy. An agricultural workout is a negotiated agreement with the lender to either extend payments, forgive interest payments, change the terms of the agreement or any number of variations. Most lenders are more than willing to work with the operator rather than foreclose their interests. If the workout is unsuccessful the operator may consider bankruptcy. Typically, the operator would list all of its assets and all of its debts for the Federal Bankruptcy Court. A bankruptcy Trustee would take control of the assets and debts and settle with the creditors. Unfortunately most times that bankruptcy is taken as an option there are little assets left to continue operations. The operator is forced to rebuild from ground zero, however, the good news is that the operator is given a fresh start without the creditors hampering his future decisions. Bankruptcy is addressed in greater detail by using the following link Bankruptcy to connect to a different part of our web site.

An agricultural operator, like any other good businessman, must be concerned with federal and state taxes. Both the Federal and State Congress have enacted legislation to encourage agricultural operations and give operators a break so that they can successfully continue to feed our nation. Please link to Taxation.

Finally, a farmer or rancher must be preparing to pass the operation to the next generation. This area of agricultural law integrates with the ownership of land and business entities discussed above. How the land is owned and the structure of the business will definitely affect how the property is transferred to the next generation. Based on these earlier decisions a determination of how to transfer the business must be determined. Typically, however, either a will or a revocable living trust is implemented. A will simply is a document which sets forth your wishes as to who receives your property after your death. If an operator does not have a will the State of Montana has designed one for you. It is always better to have you make these decisions rather than the State. In the alternative, the operator may consider a revocable living trust. This type of trust is revocable, meaning you can terminate it at any time, and living which means it was drafted while your alive. The advantages of a trust are that the property held by the trust usually avoid probate and are simply transferred to the next generation by the trustee. It is also useful during the operators lifetime should they become incapacitated and unable to manage their affairs. There is no difference estate tax wise between a trust and a will. However, one must structure their estate planning documents to take full advantage of the unified credit. Currently the credit is $1,000,000 and is expected to be larger over the next few years. Detailed information regarding estate planning can be found by using the following link Estate Planning.

Operating an agricultural enterprise is not an easy business and requires skilled attorneys, accountants and other professionals to understand and implement the many varied laws, regulations and rules that must be satisfied. We at Church, Harris Johnson & Williams have chosen to live and work in Montana and are uniquely qualified and interested in helping an Agricultural operator to manage their business in a cost effective and profitable manner.