In their Estate Planning farm families usually rely on a trust to avoid unnecessary taxes and government involvement. By creating a trust the farmer makes sure that his intentions for distributing farm assets prevail after death.
When a trust is in effect, there is no need for probate because the trust owns the property and the trust never dies. Moreover, a trust is protective when there are disability issues. Upon disability, a successor trustee takes over the trust administration obviating the need for the court to establish guardianship. However, when the government gets involved, farm assets that should pass to beneficiaries instead pay probate expenses and estate taxes.
But is a trust an adequate vehicle for protecting farm assets? After all the farm is a business and liability is always a concern. Placing the farm operations in a LLC shields it from potential liability because the trust owns the LLC, not the farm. A LLC offers protection from creditors and a means for in transferring ownership in the future to family members who will manage the farm.
What happens to farm property in a trust when a farm employee incurs accidental injury or death while working on the farm? The farm faces a possible lawsuit from the employee or survivors which puts farm assets at risk. If the court enters a judgment against the owners, they may have to sell farm assets to pay the settlement.
On the other hand, when owners set up a LLC for farm operations and make the trust the LLC owner, they secure firewall protection. Since the farm is an operating entity, employees work for the entity owned by the LLC not the farmer. A court judgment against the farmer will not reach the farm because the LLC owns it.
Trusts offer significant property protection but in certain situations a trust fall short. The LLC serves a different purpose. Both are essential for protecting the family farm. Please contact us for information on effective estate planning.
