Is a Trust the Best Way to Safeguard Your Farm’s Legacy?

If you’d ask any farmer to name their largest asset, most likely they would say their land. Land is the underlying asset that allows you to generate an income. It’s critical to your family’s wealth and legacy, and must be protected. One strategy some may use to protect land is to insulate it within a trust.

The Pros and Cons

There are different reasons to place assets into a trust. Maybe they are worth millions of dollars, and you’re worried that estate taxes may diminish their value. Maybe you want to control how those assets get used, when the assets can be sold, and how much of the principal balance or interest income can be accessed.

If designed properly, trusts also offer asset protection. Assets are gifted or sold to a trust and owned by the trust, not an individual. They can also be valuable for setting up the ownership and continuity of operations to the next generation. Trusts can help heirs avoid the often expensive and time-consuming process of probate, and possibly reduce the burden of estate taxes on beneficiaries. In most cases, you have ample latitude about how you set up the trust and its terms, such as how the land is used and who can use it.

There are also downsides.

“One of the benefits of owning land individually is that at death, the property generally receives a step-up in basis,” said Greg Smith, partner at Georgia law firm Conger & Smith and a real estate law specialist. “If the land has been transferred into certain types of irrevocable trusts that remove it from the taxable estate, that step-up in basis may be lost.”

This refers to a new assessment of the value of the property on the date of death, so your heirs may not pay capital gains taxes, as long as the property was sold at the newly assessed value. This is important, as itcould potentially be the difference of thousands of dollars in taxes.

Smith also noted: “In order to maximize the benefits of holding land in trust, owners may also need to give up at least some control. And there are a lot of people who may not want that.”

3 Trust Examples

Before entering into a trust, you, your advisers, and estate planning attorneys should discuss several other implications. If a trust makes sense for your operation, you can choose from several types, depending on the goals you have set for your family. Here are just three examples:

1. Revocable Trust

This type of trust is often the most common and easiest to set up, and may allow your heirs to receive a step-up in basis when you pass away.

Suppose you like the idea of transitioning the farm to future generations, you don’t have assets over $15 million (the current lifetime gift exemption), yet you want to retain control of the assets while you are still working. A revocable trust allows you to amend, revoke, and terminate it at any time.

However, if plans stay the same, your beneficiaries can avoid probate. If you become incapacitated, a successor trustee is appointed.

2. Charitable Remainder (or Lead) Trust (CRT)

Maybe you like the idea of a family foundation, nonprofit, or your agricultural alma mater becoming the future owner of the property. However, you still need income while you are in retirement.

To establish a CRT, you donate an asset for the trust to sell. The trust then invests the proceeds in index funds, annuities, or other vehicles to generate an income stream for the donor or beneficiaries. Once the donor passes away, the remainder is donated to a charitable organization.

“Charitable remainder trusts are something we do a lot of for families, and it has some major benefits,” said Steve Hill, a gift planner at the University of Nebraska Foundation. “People need to understand there will be some volatility; however, turning these assets into an income stream can be viable for a long time.”

He added that with land and real estate prices near all-time highs, “CRTs are a great tool for real estate and can provide the liquidity needed to fund an income stream in retirement.”

You may alternatively choose a charitable lead trust (CLT), which Hill said is less common. The charity takes the “lead,” or income, and then the remainder goes to the family after the donor passes away. The key here is balancing the family legacy with immediate income tax deductions, capital gains avoidance, and future estate tax savings.

3. Intentionally Defective Grantor Trust (IDGT)

If you have assets over $15 million, this may be a valuable type of trust.

The idea is to shift your asset’s growth to beneficiaries while you pay the income tax on the asset’s earnings that are within the trust. For example: Say you purchase farmland for $10 million, and you anticipate the land to appreciate significantly. By gift or sale, you can transfer this land to an irrevocable trust at a value that may be discounted in certain circumstances. The land, and all appreciation on the land, is now outside of your estate for estate tax purposes. Further, when using a grantor trust, any income tax associated with the land is reported and paid by you, using assets outside the trust, which further reduces your taxable estate. This approach can protect these assets for the next generation (and beyond), free from estate tax. The downside, of course, is the lack of step-up in basis on the asset when you pass, so they require careful planning to properly implement.

“IDGTs may be used to fund direct-to-children transfers in the event a spouse does not need income from that asset in retirement,” said Kim Hoipkemier, a partner with the law firm Georgia Estate Planning.

Goals can vary slightly from family to family; however, almost everyone can get on board with the importance of keeping assets within the family, reducing headaches for heirs, and setting up future generations for success. A trust may help.

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