Why Estate Planners Should Recommend a 721 Exchange for Farmland Clients
As an estate planner, your role is to help clients preserve and grow their wealth while minimizing conflict and maximizing flexibility for future generations. For clients who own farmland—whether they actively farm or hold it as part of a broader investment portfolio—a Section 721 exchange can be a powerful tool in achieving those goals, particularly when multiple heirs are involved.
What is a 721 Exchange?
A 721 exchange allows real property owners to contribute their real estate into an operating partnership in exchange for units. These units are essentially shares that represent ownership in a diversified portfolio of real estate managed by professionals.
Why Consider a 721 Exchange for Farmland?
1. A Smoother Estate Transition for Multiple Heirs
One of the biggest challenges in farmland succession is dividing a highly illiquid asset—land—among several heirs. A 721 exchange converts that illiquid farmland into units, which are far easier to divide, value, and eventually liquidate.
-
Equal and flexible distribution: Heirs receive units instead of an undivided interest in physical land, allowing for cleaner and more equitable estate planning.
-
Avoid forced sales: Heirs with differing goals—some may want to keep farming, others may want liquidity—don’t have to fight over the future of the land.
2. Preserve Tax Benefits
A 721 exchange defers capital gains taxes. This allows clients to move from concentrated farmland holdings into a professionally managed portfolio without triggering an immediate tax event.
-
Step-up in basis: Upon the client’s passing, heirs may still benefit from a step-up in basis for the units.
-
Avoid fragmentation: Reduces the likelihood of land being split up or sold under pressure due to tax or liquidity issues.
3. Diversification Without Immediate Tax Consequences
Farmland can be an excellent investment, but it’s also highly localized and illiquid. A 721 exchange enables landowners to:
-
Transition from a single-asset risk profile to a diversified portfolio.
-
Maintain passive income potential from units.
-
Gain access to professional asset management, removing the burden of operations or leasing.
4. Estate Liquidity and Planning Flexibility
Units received from a 721 exchange can offer more liquidity options than farmland. Over time, these units can often be sold in stages—giving heirs or trustees the ability to manage liquidity needs more effectively.
Ideal Candidates for a 721 Exchange
-
Aging landowners without a clear succession plan
-
Families with multiple heirs and differing goals
-
Clients looking to transition from active farming to passive income
-
Estates seeking to minimize conflict and maximize post-transition flexibility
Help Your Clients Plan with Clarity
Recommending a 721 exchange as part of your client’s estate strategy can reduce family disputes, enhance financial outcomes, and streamline asset management for future generations. If you’re working with farmland owners considering a transition, a 721 exchange deserves serious consideration.
