Who will own or benefit from your farm in the future? This is an important question to ask as you work through your succession plan. If your goal is to keep land in your family and together, creating a trust might be a smart decision.
“In its simplest terms, a trust is an arrangement where one party holds legal title to property and another party has the right to the benefits from that property,” says Shannon Ferrell, an ag law professor at Oklahoma State University Extension.
For example, Joe Farmer establishes the Joe Farmer Living Trust and transfers ownership of his land and farm assets to it. At the same time, he prepares instructions for how the trust will be managed and how resulting income will be distributed, and he names the beneficiaries. For Joe’s life, he can manage and benefit from the assets. At his death, the trust and its assets can transfer to his children.
In addition to protecting assets, trusts are a good option if you have young children or beneficiaries with disabilities, says Breanna Young, an attorney with the Davis Brown Law Firm in Des Moines, Iowa.
“You may want your children to receive your assets but not until they are, say, 35 years old,” she says. “A trustee can hold the assets and use the net income for the children’s benefit, but the children won’t receive the assets outright until they turn 35.”
Decide what you want to accomplish before you set up a trust, Young says. That will help you determine the type of trust to use, as trusts fall into two main categories: living and testamentary. Living trusts go into effect during the trust-maker’s lifetime. Testamentary trusts are created under a will and can be used to provide care for a spouse, child or other beneficiary, or to restrict the transfer of property.
Living trusts have two main subcategories: revocable and irrevocable. “Revocable trusts can generally be revoked at any time, so long as the trust-maker has the capacity to do so,” Young says. “They’re similar to a will, since trust-makers specify who gets what after their death.”
Irrevocable trusts cannot be revoked, Ferrell says. “They are frequently used to manage estate tax liability for farmers who own more property than the federal estate tax exemption amount, as placing property into an irrevocable trust can reduce the amount of a person’s estate,” he explains.
Visit with your attorney and advisers to see if a trust is the right option for you. As with any decision in succession planning, know your goals and kick-start the conversation.
Do You Need A Trust?
Not everybody needs a trust, says Shannon Ferrell, an ag law professor at Oklahoma State University Extension. But they can be effective tools for estate planning. He outlines the pros and cons.
- Assets held in a trust do not have to go through the probate process, which saves time and money.
- Property and assets can be held and managed in a trust for children until they reach a desired age.
- Trusts are difficult to contest, and courts rarely want to modify the terms of a trust.
- Trustee fees apply if you choose an outside firm or institution to serve that role.
- The trustor transfers the legal titles of assets into a trust, so the trustor cannot deal directly with the assets. They must act through their role as the trustee.
- A trust does not eliminate the need for a will.