Everybody likes some control of their assets once they die. How much control you’d like to have can help determine if a trust is right for you. Do you care what your heirs do with the farm? Would it bother you if they sold it or sub-divided it? Are you concerned about what your children would spend your money on once you’re gone? Are your children already successful or independently wealthy? If so, a dynasty trust could be for you.
Farm Journal Legacy Project adviser Polly Dobbs of the Dobbs Legal group says a dynasty trust is a fancy way to say your children don’t actually inherit your assets. Instead, they receive income from the trust without ever owning anything and that can be a very good thing for tax planning.
Don't Own Anything
“I had one lawyer put it this way,” she explained to the audience at the Executive Women in Agriculture conference last month in Chicago. “’No good can come from me owning anything. I can only screw it up. I can die young. I can get sued. I can just screw it up, so don’t let me own anything. Keep it in that trust.’”
According to Dobbs, what’s also nice about a trust is you pick who controls the assets and you dictate continued management of the farm owned by that trust.
“So if it’s going to be cash rented to someone, if it’s going to be maintained or if it’s OK to sell it, you say all that in your trust and your land stays in your trust, “ she explains. Dobbs also advises cash rent guidelines be outlined in the trust so there’s no argument among the heirs how much the land is worth.
In addition, a dynasty trust can help the next generation avoid paying estate taxes because the assets aren’t owned by them.
“If you are already creeping up toward $11.2 million, and oh by the way grandpa is still living and dad is still living and you’re going to inherit millions of dollars-worth of farmland when they finally die in their late 90s, that’s terrible planning,” she says adding that the assets in that scenario will be subject to the estate tax multiple times. “A dynasty trust can do a generation skip, and smart, rich people should ask their parents to do this for them.”
At one time, the laws of all 50 states prohibited a trust from lasting beyond 21 years after the death of the last beneficiary alive at the time the trust was created. This rule against perpetuities has been modified or abolished in some states (i.e., Alaska, Arizona, Delaware, Florida, Georgia, Idaho, Illinois, Iowa, Maine, Maryland, Nevada, New Jersey, Ohio, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin).
A trust created in one of these jurisdictions can last for many generations. Even in states that still maintain the rule, a trust can be created that will last for a substantial amount of time.
Note: This article appears in the January 2018 magazine issue of Dairy Herd Management.