A trust provides structure for how you want the land managed after your death and provides beneficiaries with an ongoing income steam.
As you move forward with a trust, it’s important to talk with your family about the future of the land, gather all financial and ownership documents and outline the parameters of the trust with an estate planning attorney.
Reviewing the trust periodically can, among other things, make sure it’s current in relation to changes in laws, estate taxes and the economic environment.
Farm and ranch landowners run several risks when they fail to make a transition plan.
These include the danger that the land will be mismanaged, sold off or lost because the land’s heirs can’t agree about how the land should be operated.
“If you don’t provide a legal entity and structure for how you want your land managed, you have no control over what will happen after your passing,” says Jim Myhra, senior vice president and managing director of the Farm and Ranch Management Group at U.S. Bank.
Passing down a farm or ranch to the next generation can provide your heirs with a secure, long-term income stream if the land is well managed. While each situation is unique and requires a customized customized approach, consider taking the following four steps in your planning.
The planning process begins with honest conversations about what you and your family want from the farm or ranch, as well as the specifics of the plan. These conversations can be tricky, especially if more than one child is interested in, and capable of managing, the land. Or conversely, if nobody is interested.
In these conversations, consider the following:
Do the different generations share a common vision?
Can family members work together?
Are family members willing to stay on top of technological and market changes?
Can family members negotiate leases and other contracts imperative for generating a fair return?
Will they understand and have the time and resources to handle the agronomic and soil stewardship management?
Your heirs need to understand what running the farm or ranch business entails. As part of the planning stage, gather all the information on the land and the business. This should include:
Expenses and debt
Land management documents
Documents that describe how the farm or ranch is operated
The above information should help establish baseline financial expectations for the land to assist in making decisions about the distribution of the estate.
“If you don’t provide a legal entity and structure for how you want your land managed, you have no control over what will happen after your passing.”
Jim Myhra, managing director of the Farm and Ranch Management Group at U.S. Bank
In some cases, you may want to make arrangements to reduce your management or ownership.
One option to consider is engaging with an estate planning attorney to create a trust for the property. Putting your land in a trust can provide substantial benefits. “It may protect your family from estate taxes, creditors, divorce and lawsuits, and it defines your wishes as to how you want that land to be taken care of and by whom,” Myhra says.
A trust can establish:
How the land will be managed
Who will be in charge of managing the property
Who will benefit from the revenue generated from operating or selling the land
How long the land will remain in the trust and under the trustee’s oversight
The creation of a trust can be particularly beneficial if your children don’t want to actively manage the property. You may determine that an unbiased professional trustee is the most appropriate choice to manage the land. Professional trustees/land managers can help obtain the best lease terms. They also oversee the care of the land and other assets while the children or surviving spouse continue to benefit from the revenue and retained ownership with certain types of trusts.
Another option is to use annual gifting (which is tax-exempt up to certain dollar amounts) to gradually give the farm or ranch to family members while you continue to work alongside them.
Periodically reviewing your trust with your attorney and trustee helps to ensure it’s updated in relation to changes in laws, estate taxes and the economy. Periodic reviews also help accommodate any changes in the family’s status, such as a birth, marriage or death.
Regular reviews and updates also demonstrate that your wishes haven’t changed. This can be important in families in which one or more parties contest the trust. “If you make a trust and don’t look at it again for 20 years, it’s much easier to contest,” Myhra says.
Having a plan in place can help ensure that your wishes are carried out. It’s the best way to work toward protecting your land today, so that it benefits the family for generations to come.
Specialty assets require special attention. Learn more about the Specialty Asset Management Group at U.S. Bank.
Non-financial specialty assets, such as real estate, farm, ranch and timber properties, oil, gas and mineral interests or closely-held business interests are complex and involve unique risks specific to each asset type, including risks associated with natural events or disasters, complex tax considerations, lack of liquidity and the potential for total loss of value. Specialty assets may not be suitable for certain investors.
Smart land management is crucial for farm owners. Learn how to get the most out of this specialty asset.
Four strategies to help make the trust planning process easier for everyone.