A widower and I had an interesting conversation in my office recently. He had a living trust written just a few years ago, was not happy with it, and was thinking about engaging my services.
Him: “I don’t want the farm to get out of the family. Two of my kids aren’t interested and would sell it in a heartbeat. The other one farms and would take good care of it.”
Me: “So how do you want to leave the farm when you pass away?”
Him: “I want the farmer to get most of it and be able to buy the rest of it — cheap — from the other two.”
I had skimmed through his living trust. It didn’t say anything like that.
Me: “So why doesn’t your trust say to do that?”
Him: “I told my last attorney that is what I wanted to do, but she said I couldn’t. She said I have to leave everything pretty much equally, with each of my kids getting about the same amount of ground.”
He had been given incorrect legal advice.
We went on to discuss his goals further, and explored various ways of accomplishing his objective of keeping the farm in the family while preserving family harmony.
Law of succession
You should plan to leave your estate to whom you want and the way you want. One freedom we have in America is “freedom of disposition,” a principle of trusts and estate law that says you can dispose of (give away) your property in any way you want. It has been called the organizing principle of the American law of succession. This freedom provides an incentive to be productive during your life and accumulate wealth rather than consuming (spending) it all as you go. There are three main limitations on this freedom:
1. transfer taxes
2. limits on “tying up assets” forever
3. duty to provide for your spouse
Let’s briefly look at each and how they apply in Illinois.
Transfer taxes are what we know of as gift and estate taxes. When you give your property to the people you choose, this transfer (gift while living, estate on death) is subject to tax. Illinois imposes a tax on estates exceeding $4 million at an effective rate of over 28%. The federal government at present only charges a tax (40%) if the estate exceeds $11.4 million. Depending on the size of your estate, this does impose limits on your “freedom of disposition.” However, with proactive planning, most of those taxes can be avoided, even on significantly larger estates.
There are laws in most states that say you cannot permanently restrict the transfer of property. Before such laws, some people did that in an attempt to avoid estate taxation: They transferred property to their children on the legal condition that it had to automatically pass to their grandchildren, then their great-grandchildren, and so forth, indefinitely. The children and subsequent generations got income for life but had no power over the property. To avoid transfer tax, people robbed all future generations of freedom of disposition!
Laws were enacted to prevent this practice. However, about 20 years ago, Illinois amended its law. Now your freedom of disposition allows you, using trusts for your heirs, to include conditions or guidelines that you consider appropriate. Don’t go to seed on the idea of tying things up too tightly. You cannot predict the future. But feel free to create trusts to protect your successor’s opportunity to farm, minimize future transfer taxes, and shield assets from catastrophes such as divorces and lawsuits.
What about a duty to provide for your spouse? Illinois law says that even if your will leaves nothing to him or her, your spouse has a right to receive one-third to one-half of the estate. While most married couples want to provide for their spouse, you don’t have to; the law has a very large loophole. Perhaps yours is a second marriage, and each of you is entirely self-sufficient. If you want to leave less of your estate to your spouse or want to provide legal protections on what you do give him or her, plan with a revocable trust. That trust is not governed by your will and is therefore not subject to the one-third to one-half requirement.
You don’t have to divide things equally among your children. Even the three limitations on your freedom of disposition turn out to be pretty toothless. So, feel free to think outside your attorney’s box!
Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com.