Perhaps you are dealing with estate planning documents that were written and signed decades ago. For instance, you may be a beneficiary of some planning structure that was done long ago by your recently deceased parents.

“What were they trying to do?”

Or perhaps you are looking at documents today that you signed years ago, and now you are uncertain of their purpose or effect.

“What did I do?”

When I am counseling beneficiaries, I am likely to inquire: “What did your parents do for you?” The honest answer might be genuine ignorance: “I have no idea. Can you help me figure it out?”

More often, there is at least a vague notion: “Well, they were worried about losing the farm to the nursing home. I remember them talking about that.” Or maybe, “My folks were always trying to avoid income taxes, and I think this limited liability company was set up for that” or “They set up the LLC so they wouldn’t get sued.” Perhaps it is as simple as, “They did it to avoid probate.”

When advising a present owner about some legal structure they already have in place, we have similar questions. What is your understanding of what you did? I might ask, “What did you accomplish by what you signed?”

Few people are able to describe the technical details, but with a little luck, they remember generally what they wanted to do and can describe generally how the professional explained that their goal was being met.

Analyze the planning

From any such answer to the question of what was trying to be accomplished, we can begin to analyze the planning. We can look at the business organizational documents or the trust agreement, but rarely do those documents tell the whole story. The operating agreement doesn’t show what the LLC accomplished. The trust agreement won’t explain what the trust did. Usually such documents are relatively generic forms that leave us speculating about the maker’s specific motives.

What matters more than what a document says is how the legal structure was used in the real world. What outside records are there to show how it was being used? What was reported to government agencies like the IRS or USDA? How did anything of value get into the structure?

Did this LLC engage in a farming operation? Did it have a bank account, pay for inputs, collect grain checks, report the income and expenses on a tax return, and pay all necessary taxes? Did third parties have the LLC name on their accounts, knowing they were doing business with the company and not an individual? If the LLC was set up in hopes that it would provide income tax benefits and reduce the risk of a lawsuit taking the farm, there should be a clear paper trail like this showing how the LLC operated.

Who owns the LLC and how did the LLC become owner of anything? If father and daughter each own 50% of the LLC, Dad put in $1 million worth of machinery and daughter put in nothing, then in reality, a gift has occurred. Daughter received half a million in machinery from Dad. Was that gift properly reported?

If the legal structure is a trust, did this trust file any tax returns? If not, what tax law exempted it from doing so? What evidence is there that this trust even owned anything? If land is owned in a trust, the deed will reflect that. If the trust holds securities, CDs or other investments, the brokerage firm or bank ownership records will match. A taxpayer identification number will be tied to the structure, and 1099s or K-1s issued that way.

Who benefits from the trust, and how did anything get into it? Did Mom establish the trust for her son and contribute property to the trust? At some point, the economic substance of this mom-to-son transfer must be reported. Either Mom made a gift for her son’s benefit now, or when she dies, her son will inherit the value. If the first option, Mom must file a gift tax return. If the latter, then the property is reported on Mom’s estate tax return.

So, what have you done? What did those documents accomplish? Substance matters more than form.