Should Land Go Into a Disclaimer Trust or Pass to the Spouse?

Problem:

My husband recently passed away. Our estate plan is old, but our attorney says it still works. My husband’s half of the land could come to me outright or be disclaimed to a separate trust for my benefit. I’d receive the income for life, and upon my death, the disclaimer trust would split equally between our three children. Unfortunately, our wills made no provisions for our farming son. He’s worried this won’t play out well with his siblings, but my attorney says the trust could help us avoid estate taxes. I’m struggling with this decision. Should I put his land in the disclaimer trust or keep it in my name? – Submitted by email from J.L.

Solution:

I’m sorry to hear about your husband, J.L. This process can feel overwhelming. Here are five key factors to consider:

1. Estate Tax:

The current federal estate tax exemption is $13.99 million per person. If you disclaim your husband’s half of the land to a trust, its value doesn’t count toward your personal estate, potentially reducing your estate tax liability. However, if you keep the land, you can “port” your husband’s exemption under IRS form 706. This would increase your estate tax limit to nearly $28 million. The ported credit remains flat and does not adjust for inflation, yet your estate continues to grow. Reviewing your estate projections with a tax and legal adviser is essential, especially if state estate taxes also apply.

2. Asset Protection:

Once the land is in the disclaimer trust, it becomes irrevocable. Trust assets can be managed, but the income and principal distribution rules generally cannot be changed. This protects trust assets from creditors, second marriage complications, and incapacity. Do you need immediate protection on the land, or can it remain accessible?

3. Capital Gains Tax:

Upon your husband’s passing, his land received a stepped-up cost basis to the market value, meaning it can be sold without any taxable gain or fully redepreciated. The disclaimer trust preserves the new basis, but it doesn’t get a second step-up in basis upon your death. If you keep the land, the entire farm gets a stepped-up basis upon your death, avoiding tax, if sold.

4. Control:

The trustee has fiduciary responsibility over the disclaimer trust assets. They select the renter, set the rent price, and determine capital improvements. Did your estate documents define the rules for trust-held land? Are you comfortable with who controls these decisions? Or do you want to redefine the rules through your estate?

5. Distribution:

The disclaimer trust ultimately divides the land between the kids, with no clear plan to bring it back together. In my experience, that usually doesn’t end well. Would you want to farm, knowing half the land was at risk? Trying to retrofit a farm succession plan around a generalized irrevocable trust is like trying to move a corn row after it’s planted. It’s possible, but it’s messy and never looks quite right!

To me, operational control and intentional distribution are most critical to a successful plan. I’ve seen more farms lost to family disputes than to taxes. The estate tax law “sunsets” in 2025, but historically, limits have improved, and there are proactive tools to reduce your estate, if needed. 

I strongly suggest:

• Taking the land in your name.
• Filing a 706 estate tax return to port your husband’s credit.
• Establishing clear rules for farm succession in your estate.

I’m sorry your husband couldn’t be part of this decision process, but I’m glad your plan gives you options. Use them to create a farm succession strategy that works.