Fractionated Ownership of Indian Lands

Current Status

As ownership of Indian lands descends from one generation of persons to another, fractionation continues to worsen. The Department of the Interior may soon be unable to cope with the record keeping of land titles and accurate distribution of income. In addition, if the challenge to the constitutionality of the Indian Land Consolidation Act succeeds in either of the cases Youpee v. Babbitt or Klauser v. Babbitt, the courts may order the Department to compensate individuals for the interests in trust property that escheat to Tribes.

In October 1994, the Assistant Secretary - Indian Affairs opened consultations with Tribal leaders and individual landowners concerning a legislative proposal to address the problems of fractionated heirship. Since then more than 200 meetings, attended by more than 4000 persons, have been held on or near Indian reservations by the Bureau of Indian Affairs, and, in some cases, by Tribal governments, to discuss the proposal and to make additional recommendations and suggestions for alternatives.

TRIBAL IMPACT: Tribal governments will benefit by DOI’s program. However, Tribal leaders appear hesitant to favor the Tribal government's interests over those of individual members who own allotted lands.

FUNDING IMPACT: $300 million

Draft legislation is presently being considered by the Department of the Interior to amend the "Indian Land Consolidation Act"

(25 U.S.C. 2201 et seg.) to address the Indian heirship problem. The legislative proposal package includes initiatives to consolidate highly fractionated interests (two percent or less of ownership) in allotted Indian land and a land acquisition program with provisions to transfer the properties to the Tribes, but retain the income from those properties until the purchase price paid by the Federal Government is repaid or 20 years, whichever occurs first. In order to prevent further fractionation, the legislative proposal limits inheritance in allotments to members of Federally recognized Tribes, and further limits inheritance by intestate succession to first and second degree relatives with provisions for life-estates for non-member spouses. Testate succession in trust is limited to one devisee who also must be a member of a Federally recognized Tribe; if the devise is to more than one person, joint tenancy with right of survivorship will be presumed.

DOI’s legislative proposal differs significantly from two alternate proposals drafted by Indian land consolidation groups. The Indian groups take a different approach by providing individual allottees with an equal opportunity with the Tribes to participate in the acquisition program and by taking a different approach to the inheritance limitations. All legislative proposals, however, have shared the objectives of consolidation of fractional interests and the prevention of further fractionation.

BACKGROUND

"The Indian Service is compelled to be a real-estate agent in behalf of the living allottees; and in behalf of the more numerous heirs of deceased allottees. As such real estate agent, selling and renting the hundreds of thousands of parcels of land and fragmented equities of parcels, and disbursing the rentals (sometimes to more than a hundred heirs of one parcel, and again to an individual heir with an equity in a hundred parcels), the Indian Service is forced to expend millions of dollars a year. The expenditure does not and cannot save the land, or conserve the capital accruing from the land sales or from rentals. . . . For the Indians the situation is necessarily one of frustration, of impotent discontent. They are forced into the status of a landlord class, yet it is impossible for them to control their own estates; and the estates are insufficient to yield a decent living, and the yield diminishes year by year and finally stops altogether. . . . The Indian Bureau’s costs must rise, as the allotted lands pass to the heirship class. The multiplication of individual paternalistic actions by the Indian Service must grow. Such has been the record, and such it will be unless the government, in impatience or despair, shall summarily retreat from a hopeless situation, abandoning the victims of its allotment system. The alternative will be to apply a constructive remedy as proposed by the present Bill."

John Collier
Commissioner of Indian Affairs
February 19, 1934

OVERVIEW

The fractionated ownership of Indian lands is taxing the ability of the government to administer and maintain records on Indian lands. These "allotted" or individually-owned trust lands comprise approximately 11 million acres and, in size, exceed that of the States of Massachusetts, Connecticut and Rhode Island, put together. Fractionated heirship also threatens the integrity and viability of the Department's trust management systems. The problem cannot be addressed by the Tribes; it cannot be fully addressed by the Department of the Interior; it requires a Federal legislative solution.

In 1887 Congress enacted the, General Allotment Act. This Act directed the division of Tribal lands and "allotment" of them to individual Indians. The purpose was to accelerate the civilization of the Indians by making them private landowners, successful farmers, and ultimately to assimilate them into society at large. Many Indians sold their land, but few assimilated into the surrounding non-Indian communities. By the 1930's it was widely accepted the General Allotment Act (GAA) had, for the most part, failed. In 1934 Congress, in Section 1 of the Indian Reorganization Act, stopped the further allotment of Tribal lands. A direct result of the GAA was the loss of over 100, 000, 000 acres of land from the Indian trust land base between 1887 and 1934. An indirect result was fractionated heirship.

As originally envisioned, allotments would be held in trust by the United States for their Indian owners no more than 25 years. At the end of the 25 years, the land would be conveyed in fee simple to its Indian owners. Many allottees died during the 25 year trust period. In addition, it quickly became evident the allottees were not assimilating and continued to need Federal protection.

As a consequence, Congress enacted limited probate laws and authorized the President to extend the trust period for those individuals who were not competent to manage their lands. The presumption was, however, that at some point in the foreseeable future the lands would be conveyed to their Indian owners free of Federal restrictions. As a consequence, Congress did not amend the probate laws even though it continued to extend the period of trust protection. Under the Indian probate laws as individuals died, their property descended to their heirs as undivided "fractional" interests in the allotment (tenancy in common). In other words, if an Indian owning a 160 acre allotment died and had four heirs, the heirs did not inherit 40 acres each. Rather, they each inherited a 1/4th interest in the entire 160 acre allotment. As the years passed, fractionation has expanded geometrically to the point where there are hundreds of thousands of tiny fractional interests.

The Department of the Interior is charged by statute with maintaining Federal Indian land records on these hundreds of thousands of fractional interests and with probating the estates of every Indian individual who owns a fractional interest in an allotment. In many cases, the fractions are so small that the cost of administering the fractional interests far exceeds both their value plus any income derived therefrom.

In 1984, Congress attempted to address the fractionation problem with passage of the Indian Land Consolidation Act. The ILCA authorized the buying, selling and trading of fractional interests but most importantly it provided for the escheat to the Tribes of interests of less than two percent. Although over 55,000 of the 2%-or-less fractional interests have escheated since passage of the ILCA in 1984, the problem of fractionation continues to worsen. The costs of maintaining heirship records and administering the land is inordinately expensive for the BIA. Approximately 50 - 75% ($33 million) of the BIA's realty budget goes to administering these fractional interests and is, thus, unavailable for investment in productive lands. Other programs are, likewise, adversely impacted, e.g., trust funds management, forestry, range, transportation, social services, etc. Utilization and/or conveyance of the fractionated property by the numerous owners is also difficult because of the need to secure the numerous consents which are required.

Currently, calculation of fractionated lease ownerships may result in a fractional denominator that exceeds 26 digits. Depending upon the amount of lease income to be distributed, it is possible that trust income may have to be collected for several years before sufficient income is collected to entitle an account holder to even one cent.

Some administrative complications that result from fractionated ownerships include the following.

• Detailed accounting records must be maintained for all transactions regardless of size, sometimes as little as $0.03 may be distributed among seven account holders, complicating the accounting.
• In most cases, OTFM policy does not permit funds to be disbursed to the account holders until balances reach $15, thus increasing the number of IIM accounts that require interest posting and other account maintenance activities.
• Funds sometimes remain in special deposit (suspense) accounts for long periods, according to OTFM, pending OTFM's receipt of ownership information from OTR's Land Title and Records program staff and realty staff.

Currently, OTR maintains official Federal Indian land title and beneficial (lease) ownership information. OTR's Land Title and Records program staff are responsible for determining ownership and encumbrance for each Federal Indian tract of land and for certifying for the Federal Government that such ownership and encumbrance is accurate for all legal, title, and evidentiary purposes. However, due to continuing increases in fractionation, inadequate staffing, and inadequate systems, OTR has almost a two-year backlog in land title and lease ownership determinations and record keeping.

Each time ownership changes, OTR's Land Title and Records program staff must perform time-consuming manual determination and documentation of ownership interests. This is because OTR's Land Records Information System, as designed, is not capable of performing automated chain-of-title calculations and it does not store chain-of-title or calculated ownership information. LRIS system improvements have been delayed for the past two years due to reductions-in-force and budget cuts. In addition, LRIS is not integrated with OTFM's trust fund accounting systems.

Because official ownership information may be significantly out-of-date, OTFM has relied on unofficial ownership data in BIA's Integrated Resources Management System. IRMS ownership information is periodically updated by OTR realty staff located in BIA's Agency Offices based on preliminary information that they have developed for use in probate determinations. However, unlike LRIS information, it is not verified or certified. As a result, OTFM cannot ensure that income is distributed to the proper account holder.

Inactive IIM accounts, which are defined as accounts with no transactions for 18 months, also increase the administrative burden for IIM accounts. Accounts may become inactive because they are in suspense status or because probate decisions are pending. As of

September 30, 1996, OTFM reported that there were approximately 60,823 inactive IIM accounts. According to information provided by OTFM, these are generally low balance accounts. Administrative costs associated with inactive accounts include:

• the cost of computer processing time;
• the administrative cost and responsibility of safeguarding the accounts; and
• the cost of preparing, printing, and mailing quarterly account statements.

More than 12, 000 persons, 90% of whom reported themselves as members of Federally recognized Tribes, responded in writing during 1995, included written comments explaining their disagreement with the proposal or making suggestions.

Sixty-five percent (65%) of the respondents in the survey of landowners agreed with the concepts of consolidating small fractional interests in the Tribes and preventing and slowing further fractionation. Fifty-one percent (51%) of the respondents would be willing to sell their small fractional interests. An additional group would be willing to sell if they could be assured of (1) fair market value for the sales of fractionated interests, (2) tribal acquisition of title immediately, or (3) an opportunity for financing co-owner purchase options.

PROPOSED SOLUTION

Any legislative proposal must have two elements: existing small fractions must be eliminated and further fractionation must be prevented or drastically slowed. The goals are to reverse the adverse effects of the GAA and promote Tribal self-determination. The existing escheat provisions of Section 207 of ILCA have been found to be unconstitutional in Youpee vs. Babbitt, 67F.3d 194 (9th Cir 1995). If the Supreme Court sustains the 9th Circuit Court of Appeals decision and Section 207 of ILCA is found unconstitutional during the pendency of the legislation, or thereafter, further amendments to the Act will be required. The essential elements of the legislation should include the following:

1. A land acquisition program that authorizes the Federal Government to purchase fractional interests from willing sellers. These interests could be transferred to individual Indians or to the Tribes without any out-of-pocket costs to the Tribes.
2. The creation of a priority for the acquisition of fractional interests of two percent-or-less.
3. Some mechanism whereby fractionated interests transferred to an Individual Indian or a Tribe will be subject to the requirement that all income derived from the interests will be paid to the Federal Government until the purchase price paid for the interests by the Federal Government has been recovered or 20 years (or a like time period), whichever occurs first.
4. Income generated from the acquired fractional interests should be put into a fund to be used for the acquisition of additional fractional interests.
5. The proposal should replace the subjective test in the ILCA used to determine whether two percent fractional interests will escheat, i.e., a rebuttable presumption of future income potential, with an objective test based on actual income produced by a fractional interest or on the appraised value of the interest.
6. In order to prevent further fractionation, inheritance of interests in allotments should be limited in some acceptable and equitable way. The proposal should authorize Tribes to change the limitations on inheritance established by the bill through enactment of Tribal probate codes, provided that the changes do not result in increased fractionation.
7. New inheritance limitations should not become effective for two years subsequent to enactment. Appropriate notice should be provided to alert owners of estate planning options.

In addition, the Special Trustee proposes that the legislation consider the following:

1. Individual American Indian co-owners and non-owners ought to have equal access with the Tribes to Federal funds used to acquire fractionated interests in realty. Purchase options should be granted to individual co-owners if authorized in a Tribal land consolidation plan. Federal loan programs to assist American Indian individuals in the purchase of fractionated interests in realty should be part of the program.
2. Indian Landowner Holding Companies should be authorized to hold fractionated interests in realty. Such companies can be used to combine fractionated shares into a single interest for ownership and administration purposes. The trustee would treat the holding company as a single owner. The holding company would administer interests, including ownership records, and distribute income based on these records.
3. Tribes should be eligible for Federal loans/funding for purposes of exercising Tribal purchase options,
4. The Tribes, rather than the Federal Government should administer as much of the program as practical, consistent with principles of self governance and self determination as well as self sufficiency.
5. The legislation should not deny certain property ownership rights to individuals by limiting their ability to purchase, sell and inherit fractionated interests. While certain restrictions may be necessary, the legislation should not substantially restrict the rights of individual American Indians.

Legislation is therefore needed which would consolidate the large number of existing fractionated interests and prevent further fractionation. This alone would remove a primary obstacle to the efficient administration of the trust management systems and provide a major catalyst for the timely resolution of most of the operational problems associated with trust management activities, including trust resource and realty management, probate, land titles and ownership records management, IIM accounting, collections, deposits, investments and disbursements, customer service and record keeping for all trust management activities.

An added benefit is the annual administrative cost savings estimated at the same $33 million mentioned above.