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Trusts for transfer

Article-Trusts for transfer

Can you trust a trust to accomplish your estate-planning goals? Probably, says Roger McEowen, Iowa State University (ISU) Leonard Dolezal professor of

Can you trust a trust to accomplish your estate-planning goals?

Probably, says Roger McEowen, Iowa State University (ISU) Leonard Dolezal professor of agricultural law and director of ISU's Center for Agricultural Law and Taxation. A landowner can accomplish his or her goal of continuing the ranch from generation to generation by many means and many avenues of estate planning, he says, and trusts can be part of that mix.

Among the types of trusts to consider is a revocable living trust, an estate-planning tool used primarily by people interested in bypassing probate, he says.

“It's no different than a will, other than a will is subject to probate and the property placed in a trust is not,” he adds.

Depending on your net worth, that may be an advantage. Revocable trusts are usually used by landowners with a fairly high net worth where using some type of entity structuring or trusts, or a combination of those, to deal with estate planning makes sense.

“The cost of establishing the trust up front is going to be significantly more than the cost of a basic will for mom and dad would be,” McEowen says, “and a revocable living trust accomplishes the same thing. So you pay for it up front with the idea the family is going to save on fees on the back end.”

Upon the landowner's death, the will has to be probated, which entails some cost. But the trust has to be administered as well, which also entails some cost. The advantage of the trust though, is the cost is usually about half of what probate fees would run.

“So there comes a point in time at which you cross the line and end up saving more by utilizing the trust,” McEowen says. That threshold in cost advantage of a revocable living trust over probating a will is probably somewhere around $250,000 in net worth, he says.

Because the trust is revocable, meaning the landowner can change it or eliminate it at any time prior to his or her death, it has no tax advantage.

“It's not going to save a person a dime in estate taxes over what a properly drafted will would do because the property is still deemed available to the individual and is fully includable in their estate for tax purposes,” he says.

If estate taxes are a concern, consider the use of an irrevocable trust as part of the estate plan. Usually funded by a life insurance policy that's gifted to the trust more than three years before the owner's death, an irrevocable trust removes the policy proceeds from the individual's estate.

“But this technique is generally reserved for persons with a very high net worth who could incur significant estate taxes and need to provide funds for an ongoing business or for an heir who needs steady cash flow,” McEowen says. “If your net worth is below $2 million (under present law), you have zero estate tax concerns. If your net worth is greater, some kind of estate plan is a good idea.”

Editor's note: There are a variety of trust instruments available to aid in farm transfer and tax mitigation. Confer with a specialist or research the list of resources on page 42 of this issue.