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Trusts can achieve many different purposes

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VERSATILE TOOL: Trusts can be used for many different purposes, such as avoiding probate, avoiding estate tax, benefiting charities and protecting assets for nursing home purposes.
Legal Matters: Trusts can range from overly simple to extremely complex, continuing for generations.

By Tim Halbach

In simple terms, a trust is its own legal entity whereby a person holds title to the property for the benefit of another person. The person creating the trust is called the “settlor” or “grantor.” The trust is created by putting assets into the trust. The “trustee” holds the assets for the benefit of one or more “beneficiaries.” Trusts can range from overly simple to extremely complex, continuing for generations.

For example, if I owe Bob $10 and I’m talking to Steve and Steve says he is going to see Bob tomorrow, I can give Steve $10 to give to Bob when he sees him. We have just created a verbal trust. I’m trusting Steve to hold the money for Bob and give it to him tomorrow.

Trusts can be broken down into different categories, such as living vs. testamentary, revocable vs. irrevocable or grantor vs. non-grantor. Trusts can be used for many different purposes, such as avoiding probate, avoiding estate tax, benefiting charities, and protecting assets for nursing home purposes.

Revocable living trust
One type of trust farmers commonly have is known as a revocable living trust. It is called this because the farmer has the right to revoke or amend it, and it is created while he or she is living. This is a trust created by the farmer (and usually the farmer’s spouse, if married), and the primary purpose is to avoid probate upon death. By avoiding probate, the farmer is able to keep his or her affairs private upon death (rather than through a public court process) and avoid a costly and lengthy administration process.

Usually, the farmer (and spouse) are the settlors, trustees and income beneficiaries. Then, upon their deaths, their kids become the beneficiaries; the trust terminates and the assets of the trust all transfer to the kids. Typically, the trust is established as a grantor trust, meaning that all of the taxable income from the trust is reported under the farmer’s Social Security number and income tax return.

Irrevocable trust
The other main kind of trust a farmer may have is an irrevocable trust. The main purpose of this kind of trust is to protect assets to be eligible to have the Medicaid program pay for the farmer’s (and spouse’s) nursing home stay. There are different ways to form this type of trust, but it must name someone besides the farmer and his or her spouse as trustees, such as one or more kids. The farmer must also decide if he or she wants the right to the income from the trust or not.

For example, a farmer might put 200 acres of land into an irrevocable trust. At that time, the farmer must decide if he or she wants the legal right to the income (i.e., land rent) or not. If he or she does, and then later he or she goes to the nursing home, that income has to be used to help pay for the nursing home.

It should also be noted that since the kids are the trustees, they choose to whom the land is rented. A farmer can retain a limited special power of appointment whereby he or she can change the beneficiaries of a trust as long as it is limited to a certain class of people, such as descendants. Irrevocable trusts can also be established as grantor or non-grantor trusts, meaning the income taxes (such as from rent) can be reported to the farmer or to the irrevocable trust. An irrevocable trust typically cannot be amended or revoked.

Planning with the use of trusts can be advantageous to farmers so long as they carefully plan and draft the trust. Remember, just because your neighbor says his trust does something does not mean that your trust does it, too.

Halbach is a partner in the ag law firm Twohig, Reitbrock, Schneider and Halbach S.C. Call him at 920-849-4999.



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