How Does a Trust Work for a Farm Family?

There are four elements to a trust, as described in this recent article “Trust as an Estate Planning Tool,” from Ag Decision Maker: trustee, trust property, trust document and beneficiaries. The trust is created by the trust document, also known as a trust agreement. The person who creates the trust is called the trustmaker, grantor, settlor, or trustor. The document contains instructions for management of the trust assets, including distribution of assets and what should happen to the trust, if the trustmaker dies or becomes incapacitated.

Beneficiaries of the trust are also named in the trust document, and may include the trustmaker, spouse, relatives, friends and charitable organizations.

The individual who creates the trust is responsible for funding the trust. This is done by changing the title of ownership for each asset that is placed in the trust from an individual’s name to that of the trust. Failing to fund the trust is an all too frequent mistake made by trustmakers.

The assets of the trust are managed by the trustee, named in the trust document. The trustee is a fiduciary, meaning they must place the interest of the trust above their own personal interest. Any management of trust assets, including collecting income, conducting accounting or tax reporting, investments, etc., must be done in accordance with the instructions in the trust.

The process of estate planning includes an evaluation of whether a trust is useful, given each family’s unique circumstances. For farm families, gifting an asset like farmland while retaining lifetime use can be done through a retained life estate, but a trust can be used as well. If the family is planning for future generations, wishing to transfer farm income to children and the farmland to grandchildren, for example, a granted life estate or a trust document will work.

Other situations where a trust is needed include families where there is a spendthrift heir, concerns about litigious in-laws or a second marriage with children from prior marriages.

Two main types of trust are living or inter-vivos trusts and testamentary trusts. The living trust is established and funded by a living person, while the testamentary trust is created in a will and is funded upon the death of the willmaker.

There are two main types of living trusts: revocable and irrevocable. The revocable trust transfers assets into a trust, but the grantor maintains control over the assets. Keeping control means giving up any tax benefits, as the assets are included as part of the estate at the time of death. When the trust is irrevocable, it cannot be altered, amended, or terminated by the trustmaker. The assets are not counted for estate tax purposes in most cases.

When farm families include multiple generations and significant assets, it’s important to work with an experienced estate planning attorney to ensure that the farm’s property and assets are protected and successfully passed from generation to generation.

Reference: Ag Decision Maker (Dec. 2020) “Trust as an Estate Planning Tool”

 

Trusts: The Swiss Army Knife of Estate Planning

Trusts serve many different purposes in estate planning. They all have the intent to protect the assets placed within the trust. The type of trust determines what the protection is, and from whom it is protected, says the article “Trusts are powerful tools which can come in many forms,” from The News Enterprise. To understand how trusts protect, start with the roles involved in a trust.

The person who creates the trust is called a “grantor” or “settlor.” The individuals or organizations receiving the benefit of the property or assets in the trust are the “beneficiaries.” There are two basic types of beneficiaries: present interest beneficiaries and “future interest” beneficiaries. The beneficiary, by the way, can be the same person as the grantor, for their lifetime, or it can be other people or entities.

The person who is responsible for the property within the trust is the “trustee.” This person is responsible for caring for the assets in the trust and following the instructions of the trust. The trustee can be the same person as the grantor, as long as a successor is in place when the grantor/initial trustee dies or becomes incapacitated. However, a grantor cannot gain asset protection through a trust, where the grantor controls the trust and is the principal recipient of the trust.

One way to establish asset protection during the lifetime of the grantor is with an irrevocable trust. Someone other than the grantor must be the trustee, and the grantor should not have any control over the trust. The less power a grantor retains, the greater the asset protection.

One additional example is if a grantor seeks lifetime asset protection but also wishes to retain the right to income from the trust property and provide a protected home for an adult child upon the grantor’s death. Very specific provisions within the trust document can be drafted to accomplish this particular task.

There are many other options that can be created to accomplish the specific goals of the grantor.

Some trusts are used to protect assets from taxes, while others ensure that an individual with special needs will be able to continue to receive needs-tested government benefits and still have access to funds for costs not covered by government benefits.

An estate planning attorney will have a thorough understanding of the many different types of trusts and which one would best suit each individual situation and goal.

Reference: The News Enterprise (July 25, 2020) “Trusts are powerful tools which can come in many forms”

 

Not a Billionaire? Trusts Can Still Be Beneficial

You don’t have to be wealthy to benefit from the use of a trust. A trust is a legal arrangement by which one person transfers his or her assets to a trustee who will hold those assets in trust for third parties, explains the Stamford Advocate’s article “Trusts are not for the wealthy only.” As the person who created the trust, referred to as “the settlor,” you determine who the trustee is, as well as naming the beneficiaries.

There are many different types of trusts which serve different purposes. However, the two basic categories of trusts are revocable (also known as “living” trusts) and irrevocable trusts. Their names reflect two chief characteristics: the revocable trust can be changed and controlled by the settlor. The irrevocable trust cannot be changed, and the settlor gives up the control of the trust. However, it should be noted that the irrevocable trust has certain tax and other benefits not offered by the revocable trust.

A will is definitely necessary to pass assets on according to your wishes, but a trust can serve other purposes. Here’s a look at some common reasons why people use trusts:

  • Protect assets from creditors
  • Allow heirs to avoid probate of assets in the trusts
  • Avoid, minimize or delay estate taxes, transfer taxes or income taxes
  • Control how assets are disbursed or invested
  • Facilitate business succession planning and manage business assets
  • Shelter assets for descendants, if a spouse remarries
  • Establish a family tradition of philanthropy

Trusts allow assets to be passed on quickly and privately, while eliminating some expenses for heirs. They also permit closer management of who will benefit from your assets.

The cost of setting up a trust depends on the complexity of the trust and the estate, as well as other factors, like the number of beneficiaries and how many generations are being planned for. Bear in mind that the cost of setting up a trust should be measured against the future cost of not just taxes, but any litigation that might occur if the estate is probated and becomes public knowledge, or if family members are dissatisfied with the distribution of assets.

Speak with an estate planning attorney to first determine what kind of trusts are needed for your estate plan to achieve your wishes. Discuss the role of a Special Needs trust, if any family members have mental or physical needs that make them eligible for public assistance. An experienced estate planning attorney will know which planning strategies are best in your unique circumstances.

Reference: Stamford Advocate (Jan. 19, 2020) “Trusts are not for the wealthy only”

How Do Trusts Work in Your Estate Plan?

A trust can be a useful tool for passing on assets, allowing them to be held by a responsible trustee for beneficiaries. However, determining which type of trust is best for each family’s situation and setting them up so they work with an estate plan, can be complex. You’ll do better with the help of an estate planning attorney, says The Street in the article “How to Set Up a Trust Fund: What You Need to Know.”

Depending upon the assets, a trust can help avoid estate taxes that might make the transfer financially difficult for those receiving the assets. The amount of control that is available with a trust, is another reason why they are a popular estate planning tool.

First, make sure that you have enough assets to make using a trust productive. There are some tax complexities that arise with the use of trusts. Unless there is a fair amount of money involved, it may not be worth the expense. Once you’ve made that decision, it’s time to consider what type of trust is needed.

Revocable Trusts are trusts that can be changed. If you believe that you will live for a long time, you may want to use a revocable trust, so you can make changes to it, if necessary. Because of its flexibility, you can change beneficiaries, terminate the trust, or leave it as is. You have options. Once you die, the revocable trust becomes irrevocable and distributions and assets shift to the beneficiaries.

A revocable trust avoids probate for the trust, but will be counted as part of your “estate” for estate tax purposes. They are includable in your estate, because you maintain control over them during your lifetime.

They are used to help manage assets as you age, or help you maintain control of assets, if you don’t believe the trustees are not ready to manage the funds.

Irrevocable Trusts cannot be changed once they have been implemented. If estate taxes are a concern, it’s likely you’ll consider this type of trust. The assets are given to the trust, thus removing them from your taxable estate.

Deciding whether to use an irrevocable trust is not always easy. You’ll need to be comfortable with giving up complete control of assets.

These are just two of many different types of trusts. There are trusts set up for distributions to pay college expenses, Special Needs Trusts for disabled individuals, charitable trusts for philanthropic purposes and more. Your estate planning attorney will be able to identify what trusts are most appropriate for your situation.

Here’s how to prepare for your meeting with an estate planning attorney:

List all of your assets. List everything you might want to place in a trust: including accounts, investments and real estate.

List beneficiaries. Include primary and secondary beneficiaries.

Map out the specifics. Who do you want to receive the assets? How much do you want to leave them? You should be as detailed as possible.

Choose a trustee. You’ll need to name someone you trust implicitly, who understands your financial situation and who will be able to stand up to any beneficiaries who might not like how you’ve structured your trust. It can be a professional, if there are no family members or friends who can handle this task.

Don’t forget to fund the trust. This last step is very important. The trust document does no good, if the trusts are not funded. You may do better letting your estate planning attorney handle this task, so that accounts are properly titled with assets and the trusts are properly registered with the IRS.

Creating a trust fund can be a complex task. However, with the help of an experienced estate planning attorney, this strategy can yield a lifetime of benefits for you and your loved ones.

Reference: The Street (July 22, 2019) “How to Set Up a Trust Fund: What You Need to Know”