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”

 

What Goes into an Estate Plan?

The very idea of creating an estate plan can be intimidating, but this article from Brainerd Dispatch, “Navigating your estate plan,” wisely advises breaking down the process into smaller pieces, making it more manageable. By taking it step by step, it’s more likely that you’ll be comfortable getting started with the process.

Start with Beneficiaries. This may be the easiest way to start. If you have retirement accounts, like IRAs, 401(k)s, 403(b)s or other retirement accounts, chances are you have already written down the name of the person who you want to receive your assets, if you die. The same goes for life insurance policies. The beneficiary designation tells who receives the assets on your death. You should also note that there are tax ramifications, if you do not have a beneficiary. Your assets could become taxable five years after you die, without a named beneficiary.

Be aware that no matter what your will says, the name on your beneficiary designations on these accounts determines who gets the assets. You need to check on these to be sure the people you have named are still the people who you want to receive your accounts. You should review the designations every time you review your estate plan, which should be every three or four years.

Where There’s a Will, There’s a Way Forward. The will is a key document in your estate plan. It can be used to minimize taxes on your estate, ensure that your family has the management assistance they need, and, if you have minor children, establish who their guardians should be. Don’t neglect updating your will, whenever there is a big change to the law or changes in your life. Not having a will leaves your family in a terrible position, where they will have to endure unnecessary expenses and added stress. Your assets will be distributed according to the laws of your state, and not according to your own wishes.

Directives for Difficult Times Health care directives give your loved ones direction when a terrible situation occurs. If you become incapacitated, through an accident or serious illness, the health care directive tells your family members what kind of care you want—or do not want. You should also have a health care proxy, so that a person can make medical decisions on your behalf. An estate planning attorney who is licensed in your state will know what forms are accepted.

In addition, you’ll need a financial power of attorney. This allows you to designate someone to step in and manage your finances in the case of incapacity. This is especially important if you are single, because otherwise a court may name someone to be your financial guardian.

What About Trusts? If you own a lot of assets or if your estate is complicated, a trust may be helpful. Trusts are legal entities that hold assets on behalf of a beneficiary or beneficiaries. There are many different types of trusts that are used to serve different purposes, from Special Needs Trusts that are designed to help families plan for an individual with special needs, revocable trusts used to avoid probate and testamentary trusts, which are created only when you die. An estate planning attorney will know which trusts are appropriate for your individual situation.

Reference: Brainerd Dispatch (Aug. 11, 2019) “Navigating your estate plan”

Estate Planning When a Family Member Is Disabled

This kind of mistake can wreak havoc on many lives, which is why it is so important to work with an experienced estate planning attorney who is knowledgeable about special needs planning. The article, “Crafting an estate plan to include disabled family members” from The Ledger explains what is involved in special needs planning.

Supplemental Security Income (SSI) is a federal program that pays monthly benefits to disabled or blind adults and children. To qualify, an individual must have fewer than $2,000 of countable assets and very limited income. Medicaid is a Federal and State health insurance program that helps people with limited assets and income pay for their medical costs.

While it is common for people to name their spouse or children as beneficiaries in their estate plan, if your spouse or child is disabled and receiving government benefits, an inheritance will result in their loss of benefits, unless special planning is done.

A Special Needs Trust (SNT) is designed for disabled beneficiaries so that cash, real property, or any other assets are available for the person’s benefit, while still allowing the disabled person to receive their means-based government benefits.

There are several different ways to accomplish this, depending on your family’s situation. One way is to have a testamentary Special Needs Trust created within a will or trust that goes into effect, when the creator of the trust or the will dies. A SNT can also be created while you are living and can be funded, instead of waiting for it to go into effect at your death.

A third-party SNT can be named as the beneficiary of life insurance policies and retirement accounts, investment accounts or real property. The third-party SNT assets that are not used for the disabled beneficiary during their lifetime, can pass to non-disabled beneficiaries upon the death of the disabled beneficiary.

These assets will be free from Medicaid recovery liens, since the property in a third party SNT does not belong to the disabled beneficiary.

A first party SNT is set up and funded with assets that do belong to a disabled person, and no other funds can be contributed to this type of trust by any other donors. These are often used when a large settlement following an injury is awarded. In Florida and in other states, first-party SNTs are subject to Medicaid recovery to reimburse the state.

Special needs trusts are complicated trusts and require the knowledge of an experienced attorney who devotes most, if not all, of their practice to SNTs and trust and estate planning.

Reference: The Ledger (May 2, 2019) “Crafting an estate plan to include disabled family members”