Jim and Sue have owned and operated their family farm for many years. They have worked very hard to protect and keep this farm and want to make sure, after they are gone, that the farm they give to their children is protected — and that it will remain in the family for their grandchildren.

They also wish to make sure that their son Mike, who farms, will have the right to rent the farmland at a reasonable rate. They hope each of their children will choose to keep the land through their lifetimes. However, if a child chooses to sell his or her interest, they want to be sure the other children have the option to purchase the farmland on reasonable terms. What options do Jim and Sue have to make sure the property will be protected, managed and distributed as they intend?

When making their estate plan Jim and Sue can choose how they distribute the property to their children. Often people will to choose to give property to their beneficiaries “outright.” This can happen by will, revocable trust, transfer on death deed or intestate distribution.

Outright distribution
An outright distribution means the children will each own the property in their own names. They would essentially be able to do as they please with the property. This distribution is simple to administer and works for many families. However, it is not likely to meet the needs of Jim and Sue.

First, if the property is distributed to the children outright, the property would not be protected. Their children could lose the property in the event of a divorce, bankruptcy or litigation. These situations could happen to any one or more of their children and the property could be lost as a result.

Second, if the property is distributed outright, their children would be able to manage the property in any manner they choose. This means they could rent the property to whoever they wanted, or sell it in any manner they wish. Jim and Sue would have no guarantee that their children would rent or sell the land in the manner they intend.

Their children would need to come to an agreement on how the land would be rented or sold. This may cause a strain on the family relationships because of competing interests among the children. For example, Mike may want the opportunity to rent the land at a lower rate than his siblings would be willing to offer. If they could not come to an agreement, there is a possibility that the dispute would end up in litigation.

Third, if the children receive the property outright, Jim and Sue no longer control whether the property will go to their grandchildren after their children’s death. Their children would have the power to give the property to whomever they chose. This means the property could end up with a son-in-law, daughter-in-law or even some other non-family member.

Separate trusts protect property
The outright distribution of the property to their children is not going to work best for Jim and Sue. They should consider using separate trust shares as part of their estate plan. By using a will or revocable living trust, Jim and Sue are able to establish a separate trust for each of their children. The share of the property they give to each child upon their deaths would go into these trusts. Jim and Sue can write provisions into these separate trusts that would protect the property and ensure it was managed and distributed in the manner they intend.

Jim and Sue would be able to provide terms giving the trustees of the separate trusts discretionary powers to distribute income and principal to their children. Since the distributions are discretionary, the property would not become subject to a child’s divorce, bankruptcy or litigation claim. This would provide the protection that Jim and Sue were looking for.

To accomplish the goal of ensuring that Mike would have the right to rent the farmland at a reasonable rate, Jim and Sue can write terms into the trust that say the trustees must first offer the farmland for rent to Mike. They can put the terms of the lease into the trust, and also the manner in which the rental rate would be calculated.

Additionally, Jim and Sue can put provisions into the trust that if a child wanted to sell his or her interest in the property, that the child must give his or her siblings the option to purchase. Jim and Sue can provide the terms of the sale, such as whether it would be a cash sale or offered on a contact for deed. If on a contract for deed, they could set forth the terms of the contract. They could also provide instructions for determining the purchase price. By providing the sale terms, Jim and Sue would ensure their children would have the opportunity to own the property.

Finally, by writing terms into the trust giving their children the testamentary power to give the property “only” to Jim’s and Sue’s grandchildren, Jim and Sue are able to prevent the property from going to an in-law or other non-family member.

For Jim and Sue, using separate trust shares for their children is a good option for making sure the property they give to their children is protected, managed and distributed as they intend.

Balzarini is a Rochester-based attorney-at-law with Miller Legal Strategic Planning Centers, P.A. Contact him at Miller Legal at [email protected].