There is not one person on this earth who would voluntarily opt-in to leave their affairs a mess for their family to sort out. We all want our family to feel secure and valued, and we want the future of our family businesses to live on according to what we think is best. Getting the correct legal documents in place is the only way to pass your assets and keep your farm going in a way that you want it to.
The documents must be legally written up and can be very complicated. The only way you will get the proper documents in place is to seek legal advice from a qualified attorney. This article in no way will replace the qualified legal advice that you need, nor will an internet search. But I will provide you with some basic information to consider.
Wills and trusts are familiar words to many, but not many people know the true difference between the two. Sure, they both are tools that help in succession planning, but which one is best for your family? Do you need both, or will one suffice? Both a will and a trust can be used to decide the people who will receive your assets and your estate upon your passing, and they also define the person who will settle your affairs on your behalf. In essence, they both allow you to plan what’s next for your family once you step away from this life. However, there are distinct differences that are important to keep in mind. Let’s break these two documents down a bit further.
What is a will?
A will is a legal document that says how you want your affairs handled and your assets distributed after you pass away.
What is a trust?
A trust, also a legal document, is a fiduciary arrangement in which the owner of the assets assigns a trustee to take action based on their instructions after the owner passes away. A trust can have lots of different instructions based on what the owner wants to have happen. The assets can be held within the trust and managed by the assigned trustee.
Most farm families use a trust because passing a family farm on is a complicated process with lots of moving parts. There are two primary types of trusts that you should consider: revocable and irrevocable. In short, revocable can be changed while irrevocable cannot. At this time revocable trusts do not protect from long-term care and creditors while irrevocable might in some cases.
Since farms are active, things can frequently change. It’s oftentimes counterproductive to lock our families into the legal document of an irrevocable trust. Some examples of things that might change related to your farm or planning process are you might want to use your farm as an asset to obtain financing to grow your operation or you might change your mind on who you want to have run the farm or or take over the property after you pass. This is why most farm owners with an operating farm choose a revocable trust over an irrevocable one. There are, however, scenarios where an irrevocable trust would be your best bet.
One exception to this is that irrevocable trusts can be helpful in a widow’s case. It helps the widow to not have to worry about the pressure of figuring out how to manage the assets once she’s left with the farm. It’s already been decided. In this case, she doesn’t have to think about changing her mind or being coerced in some way. What’s done is done.
There is also a third type of trust that’s rare, but worth mentioning — a special needs trust. This type of trust is particularly helpful in the scenario that one of the children or grandchildren has a disability. You want to leave something for them, but maybe you aren’t sure if they can manage the money due to a disability or a special need of some kind. These trusts can help in that type of situation.
There are many other types of trusts that can help make sure your plan is put in place in a way that you want it to be and is legally carried out. This summary gives you some very basic information to work from as you seek legal advice when you are ready.
Sometimes families do not want to use a will or a trust at all. They decided that they want to pass the farm on as a corporation with shares. There once was a family who had large production levels at their Christmas tree farm. They operated it not only as a farm, but as an annual event. People from all over town would visit this Christmas tree farm to pick their tree for the year, go on a sleigh ride, and drink hot chocolate by the fire as they were greeted by the man in red. It had become such a big part of their town, that the parents in charge wanted to pass their farm down as an LLC or a corporation.
You see, when you use an LLC or corporation, you’re creating business partners. In other words, your spouse and children are now considered business partners in more than a material way, but now also in a legal sense. One way this can be extremely helpful is to think about how many business partnerships find themselves in turmoil. Unfortunately, it’s quite common. Think about how this will affect relationships, as the partners will now be your kids, their spouses, etc. Also, think about how this will affect the farm. When you cross from the line of family-friendly affairs to stringent business law, things could become cleaner, but also a bit heavier.
A significant amount of farms that are passed on as a business entity end up in court. Let’s look at some case studies that explore this avenue further. In 2014 there was a case that went into litigation with two brothers and two sisters. The brothers actively farmed and were given 80 percent of the estate, whereas the sisters did not farm and were only given 20 percent of the estate. The brothers could out-vote the sisters at all times. So, whenever necessary, their votes overruled the sisters’ votes.
They followed every rule they needed to as a corporation with proper documentation, meeting notes, and everything else required. Later, a situation came up where the boys paid themselves $400,000 in commodities. They had a particularly lucrative year and were able to pay themselves this large sum of money. This was something they had seen their dad do, and it seemed normal and within the rules. However, the sisters didn’t think this was right; they believed they should have a piece of the pie and they legalled up and sued.
Regardless of who is right or wrong here, this is likely the last scenario you want your children to find themselves in. The last thing you’d want is a situation where siblings are pitted against each other, especially to the point that it reaches litigation. In this case, the boys won the case because they had the legal authority to do what they did. While they didn’t do anything wrong, a situation such as that can cause a rift between the family. And, isn’t that the whole reason this book is in your hands? We clearly want to avoid litigation when it comes to family, and in order to do that, we need to fully understand all our options to know the best way forward.
That said, farms should be an LLC or a corporation. As I’ve mentioned before, farms are big businesses and need to be treated as such. There are a lot of legalities in this world, and if you are an LLC or corporation, it helps protect you from litigation from outside sources. Take the example of a husband and his cousin who work the farm together. The cousin gets kicked by a bull and finds himself with a serious injury chances are, the cousin wouldn’t even consider the idea of suing the farm. His insurance company, however, will absolutely look at suing the farm. It’s completely out of his hands as to what they decide to do.
Another example for you to ponder is a story about a dad and his two sons. They have three different corporations — one for the combine, one for trucking, and one for the homestead and cattle. They hired truck drivers and one of those drivers made a horrible decision. He drank a lot of alcohol on his lunch break, drove his semi, and ended up killing someone after running a stop sign. In a case like this, only the trucking company can be sued. The combine and the homestead are safe from litigation. An already horrible situation could have been disastrous for the entire farm if the corporations were not split up. If, in fact, all three were under the same entity, they could have been sued for much more than they were.
You need to seek advice from your attorney and CPA to determine what type of legal entity is best for your business. I cannot stress enough that these are complicated important decisions specific to your situation and you will not find the answers online you must seek professional advice.
An LLC or corporation will be covered in a trust, and regardless of how you choose to format your succession plan, the important thing is that you start planning now. This is a big decision, and another of many tough decisions you’ll need to make through the estate planning process. The more decisions you can make now, the more harmony your family will have in the long run.
If you need help getting started or have questions of what the best option is for your family, please reach out to me at 605-878-0344 or email me at email@example.com. I am here to get you on the right track and am always happy to be an informal sounding board as you consider what the future holds for your family.