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| To trust or not to trust? Using trusts in farm estate plans |
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Over the next several articles we will discuss some of the different estate planning tools that farmers have at their disposal to not only minimize estate taxes, but also to meet specific estate planning goals.
These tools will range from tools that are available to practically anyone to tools that are only specific to farming operations. Readers should consider how these particular tools could be helpful to their own farm estate plan.
We will begin this discussion talking about trusts. There are many different kinds of trusts including, but not limited to, marital trusts, charitable trusts, revocable trusts, irrevocable trusts, family trusts, living trusts, and even pet trusts. Yes, in many states a person can put assets into a trust to ensure Rufus the dog is taken care of after the owner passes away.
A trust is analogous to a briefcase in that it is something where you can put your assets before they are released to the people or organizations that you designate to eventually receive the assets. Just like individuals and corporations, a trust is considered a legal entity. When a person transfers assets to a trust the assets transfer from the person and become property of the trust. The trust then holds the property for the benefit of the person, or whoever the person designates. A trust generally consists of four components:
•The grantor, who creates the trust
•The beneficiaries, who receive the income and/or principal of the trust. Most times, the grantor can also be a beneficiary
•The assets, which is the property transferred to the trust
•The trustee, who is the person that manages the trust’s assets and distributes the property according to terms established by the grantor.
Probably the most common trust is the general revocable trust. This type of trust is usually set up during the grantor’s lifetime, whereas the grantor retains the power to amend or revoke the trust. Because the grantor retains the power to revoke the trust and take back the property in the trust, the grantor is generally treated as the owner of the income and assets for income, gift, and estate tax purposes. Therefore, in itself a general revocable trust will not reduce or help eliminate federal estate taxes or inheritance taxes.
I can’t tell you how many times I have had to explain the above paragraph to clients that come to my office with a general revocable trust established thinking that it helps reduce tax liability. Media hype, unscrupulous marketing tactics, greedy estate planners, and “trust factories” are all to blame for the revocable trust hoopla. After all, if federal estate taxes and other taxes could be reduced or eliminated by way of a general revocable trust, wouldn’t we all use them?
What exactly then will a general revocable trust accomplish for a farm estate? Well, first and foremost, it will help avoid the probate process. Depending on your state, probate can be a very expensive undertaking. Some of us refer to the probate process as the “attorney retirement program”. Why? Because generally a percentage of the estate is charged for probate administration. Simply put, the larger the estate, the larger the percentage charged. Let’s say if only a 2 percent fee is charged, on larger estates the probate fee can go north of six figures very quickly. I tell clients spending a little money on a trust now will save a lot later on.
A general revocable trust will also give privacy. Generally, information that is put before the probate court is public record. So, anyone can see how much assets the deceased had, who it was left to, and so on. A general revocable trust will keep matters private because unless it becomes necessary, the trust does not get docketed with the court.
A general revocable trust will also provide asset management. At incapacity, the trust will provide for a succession of the trustee position without the requirement of a court proceeding by way of guardianship, conservatorship, or otherwise.
Once word of caution, however, is if you do have a general revocable trust, or are thinking of having one established, make sure all assets are included in the trust. Depending on your state, failure to include all your assets could leave you having to probate the assets that were left out. Thus, your heirs will be pulling double duty administering the trust, as well as the omitted assets through probate.
As long as a person knows the limits of a general revocable trust, it can be very useful in a farm estate plan. It is definitely one of our estate planning tools that can save a lot of money in the future and help ensure a smooth transition from one generation to the next.
John J. Schwarz, II, is a farmer and agricultural law attorney and farm estate planner in Steuben County, Ind. He can be reached at 260-665-9779. |
| 12/15/2010 |
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