Do I Need a Trust?
A few weeks ago, Paul and I spoke at Top Producer regarding estate planning and the various types of trusts that can fit into these plans. Finally, in the second session as the last item in the Q & A period, someone finally asked the question…What is the dollar amount at which I need to have a trust? The answer is “it depends”. Whether you need a trust is about dollars, but it’s also about several other things including control, asset protection, and family relationships. There are also individuals that will “sell” you a trust (and sometimes an expensive and complicated one) regardless of need, so be careful and thoughtful in your planning.
Let’s start with the most basic of trusts – a revocable living trust. Essentially during life, this trust operates as an extension of yourself. It can be changed at any time. It does not file a separate return. It involves retitling assets contributed to it in the name of the trust. Upon death, it becomes irrevocable, and the assets are transferred according to its terms. Simple…straightforward. Most people could benefit from a living trust in two ways: 1) If all of your assets are owned by the trust at death, there is no need to probate an estate. This not only saves in legal fees but prevents an inventory of your assets to be filed at the county for all your neighbors to view. 2) Administration of this type of trust is like a walking belt at the airport as opposed to walking up flights of stairs to get to the same place. The trust doesn’t stop, there is not an intervening entity and things just move forward without the creation of an estate, its administration and then the subsequent transfer of assets to the beneficiaries.
Most wills and revocable trusts also contain a very basic provision for the establishment of a credit shelter trust. This trust is designed to hold assets equal to the maximum amount available to avoid federal and state estate tax. These types of irrevocable trusts set-up as part of an estate plan are incredibly valuable to reduce estate taxes. They also serve to protect access to assets. For instance, the trust can give the surviving spouse access to income but not principal, thereby avoiding access by their next spouse (or the new spouse’s kids)
Then we get into the acronym trusts: CRAT, CRUT, IDGT, QPRT, GRAT, SLAT, ILIT, DPAT, GST…among others. Each of these have a purpose. For instance, CRAT and CRUTs work well for farmers nearing the end of career and serve to further spread out their last crop, eliminating FICA and avoiding the 37% tax bracket. They also work well for spreading out the proceeds of equipment sales. However, you must be able to wait for the cash over a period of years. It won’t be available for debt payoff or the purchase of a second home immediately. QPRTs work well to isolate the value of vacation homes…think Florida…and freeze that value at a certain point in time to exclude the future appreciation from your estate. An IDGT works in a similar way and allows someone to isolate a particular asset at its current value (generally a business), contribute or sell to a trust, and avoid the addition of its future appreciation to your estate. However, you also give up step-up potential and for an estate that does not look like it will be subject to estate tax, these might not be the best option after all.
These more advanced techniques are certainly valuable tools on the estate planning toolbelt, but there is not a standardized plan. If your estate consists of a 160A farm, the acronym trusts most likely don’t need to be a part of your estate plan from a mere estate tax perspective. However, if you want to make certain that the 160A farm ends up in your bloodline, an irrevocable trust should certainly be part of your will. On the contrary, if you have a large life insurance policy and a child whom you want to support, but who lacks maturity and financial acumen, an ILIT is something you should seriously consider. Both of these situations do not involve tax concerns, but something more important…your wishes. Minimizing taxes is not the place to always start. Rather the goals and wishes of each family, while considering that family’s unique situation, should be the end goal of the estate planning process.
Some form of trust most likely has a place in most farm family estate plans, but everyone’s situation is different. In addition to estate tax, make sure to consider cash flow, potential for second marriages, heirs with lifestyle concerns, protection of the ongoing farm operations, and charitable intentions.
Kelly Jackson Hardy is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers, privately-held elevators and supply dealers, and cooperatives. Kelly is a principal with CliftonLarsonAllen in Princeton, Illinois, as well as a regular speaker at tax and estate planning seminars. Kelly was raised on a hog, row crop and cattle farm in central Illinois and has been involved in the ag industry her entire life. Kelly, her husband, and two sons are active in 4-H and operate a small feeder calf operation and pumpkin business.
Hello Kelly this question has nothing to do with Trusts im struggling to find out where we report carbon credits that farmers receive
thank you