Trusts can keep the family farm in the family
By T. Michael Tallman
I can still remember the days of working with my dad and grandpa on the farm. Each fall while they were driving a harvester, I drove a truck to get our crops to market. It always seemed like we spent more time on repairs and maintenance of the equipment than harvesting crops.
When it comes to maintaining the farm over multiple generations, a trust is a tool that can keep the family farm in the family.
Common objectives for trusts are to reduce estate tax liability; avoid probate; create privacy; and provide control of assets after the owner (trust grantor) passes away.
Proving control is especially beneficial for a farm owner who wants to ensure the farm is protected and properly managed for multiple generations.
A trust requires four basic elements: a trustee, a trust document, trust property and beneficiaries.
A trustee’s duty is to continue with the vision the grantor had when they put the trust in place. The trustee named by the trust creator can be individuals such as family or trusted friends. Another option is to hire a third-party corporation that specializes in trust services and understands the rules and requirements involved in acting as trustee.
A trust document, drafted by an estate planning attorney, spells out the rules the trust grantor wants followed for the beneficiaries of the trust.
The trustee, for the benefit of the beneficiary, manages trust property such as cash, investments, land or real property.
The beneficiary named by the grantor derives the benefits from the trust, typically in the form of income or future ownership of trust assets.
In the case of creating a trust for a farm, some unique considerations may need addressed such as transferring any entity ownership interests to the trust; obtaining written consent from any lienholders; assigning a landlord’s or tenant’s interest in a lease; addressing wind lease, water and mineral rights; and transferring livestock brands.
A dynasty trust, which is an irrevocable trust intended to benefit generations of family members, can be an effective tool for farm owners. The grantor of a dynasty trust usually has three objectives: to have control for the longest time allowable by law; to protect the assets from federal transfer taxes for the longest possible period while making the assets available for future generations; and to protect the trust assets from potential claims brought by a beneficiary’s creditors.
To accomplish these objectives, the assets must be permitted to continue in trust over multiple generations.
The rule against perpetuities states that beneficial interests must at some point be vested and the trust assets be distributed to the beneficiaries. Once the assets are distributed to the beneficiaries, both transfer tax and creditor protection are lost.
As a result, dynasty trusts are best used in states that have either abolished or extended the rule against perpetuities.
Washington has extended this period to 150 years. Other states that have eliminated the rule include Alaska, Arizona, Colorado, Delaware, Idaho, Illinois, Maine, Maryland, Missouri, New Jersey, Ohio, Rhode Island, South Dakota, Wisconsin and Virginia.
A multi-generational farm is not only represented by the land that is tilled, the crops that are grown or the equipment used to harvest, it represents the hard work and determination of your family’s legacy – past, present and future. A trust can help protect and keep that legacy close to heart.
T. Michael Tallman is a certified financial planner and advisor at HFG Trust in Kennewick.
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