Farm Estate and Succession Planning
This blog focuses on making complex and difficult topics in estate and business planning understandable and applicable to the reader.
Farmland Trusts Overview
Jul 11, 2011
Farmland Trusts - Explained
A lot of farming families struggle with how to equitably distribute the land and other farming assets, once both of the parents has died. This is a very difficult question to answer, especially when there are farming and non farming children. The "right" answer is different for all families. Often my role in helping define this distribution is to provide explanations of different options available to achieve the "right" answer for the farm land distribution. One option that is frequently used, especially with families who have minor children or children who are adults, but still deciding on what they want to do with their lives, is called a "farmland trust."
A farmland trust is a "testamentary" trust (established after both of the parents’ deaths through their estate planning documents - wills or revocable living trusts) that would own the farmland for a term of years after both parents have died. It would be established only at the time of both deaths; and not applicable any time before then. At both parents’ deaths, the trust would be the "owner" of the property; however, the beneficiaries (those entitled to the income) would be whoever the parents choose – normally, all of the children, equally. The trust would be the landlord of the property, and choose a tenant to farm. Each year the trust, acting through it’s trustee (chosen by the parents in their estate planning documents), would set the cash rent price, would collect the cash rent and pay all costs and property taxes. Once the net income is derived, the trustee would then distribute the profits to all of the children in an equal manner.
The main attraction to this type of trust is that it keeps the real property as a "unit" and preserves the farmland for a term of years. This can be beneficial, as it gives your children time to decide whether or not they want to farm. If they do want to farm, the trust would direct the trustee to offer the land first to your farming child. The cash rent paid would be for fair market value (or discounted if the parents’ wanted it that way). In this situation, the farming child would wear two "hats." They would farm the land and pay the cash rent. They would also be an equal beneficiary of the net income from the land, wearing their second "hat" as a beneficiary of the trust. This benefits the farming child in two ways: 1) they have land that is guaranteed to be available to them at fair market rental value; and 2) it would be an automatic "discount" to them, as they will receive their share of the net proceeds back as a beneficiary.
If none of the children decide to farm, then the land would still be farmed, but by someone else. In this situation, the trustee would be directed to find a suitable tenant and ensure that cash rent is paid and other duties, just as described above. The land remains in the trust and the children the beneficiaries, regardless.
Another potential benefit of a farm land trust is asset protection. Testamentary trusts can provide for asset protection against untimely deaths of the beneficiaries (keeping the land in the family), creditors, lawsuits and ex-spouses, assuming the documents contain the right language. This is very "state" specific, and it is important to talk with your experienced attorney for what options you may have in this regard.
Once the term of the trust is over (determined by the parents in their estate planning documents), the trust would dissolve and the land would be distributed as the parents direct in their estate planning documents. This distribution is different for everyone. Sometimes, people using this type of plan will indicate that if there is a farming child paying rent to the trust for a term of years, it will be viewed as if they have "bought" the land from the trust. In this instance, the trust states that the land will go to the farming child, outright. How this happens can be done in a variety of ways: either all of the land goes to the farming child, or a portion of it. Or he or she may have to pay the non farming children, but at a discounted rate. There are a lot of options here – depending on what you want. One thing I stress often is, regardless of "who" owns the land once the trust is over, the importance of the goal to individually split the land so that each of the children receives his or her share as individuals; and not undivided interests where they are each owners with each other (tenants in common.) Again, this is something to discuss with your attorney, but my view is that individual ownership is beneficial, as usually all families have children with their own lives and goals which differ with their siblings. If they each owned their share of the land individually, there would be no hindrances on any of them with inconsistent goals.
Testamentary farmland trusts can be a good tool in developing the fair and equitable distribution of assets at both parents’ deaths. However, as with anything in estate planning, there may be some drastic consequences, based on law or otherwise. As always, it is very important to talk with your professionals about this, should you be interested in a farmland trust.
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