In this video series, Stephanie Burnham, a leading estate planning attorney licensed in New Hampshire and Massachusetts, breaks down the key estate planning concepts that every farmer should know to ensure their hard-earned assets stay within the family, avoid unnecessary taxes and legal hurdles and transition smoothly to the next generation. While this series will help you understand key concepts and take actionable steps, it’s essential to consult with an estate planning attorney who understands the specific needs of New Hampshire farmers. Your attorney can help tailor a plan that fits your farm's unique circumstances, ensuring that your assets are fully protected, and your wishes are honored.
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Hello, my name is Stephanie Burnham, and I'm an estate planning attorney licensed in New Hampshire and Massachusetts. Today, I'd like to talk to you a little bit about the differences between revocable trusts and irrevocable trusts, or irrevocable trusts. Revocable trust are documents that are created by someone in order to hold their belongings, their real estate, bank accounts, motor vehicles, and to control how those assets are managed and transferred to their family in the event they pass away.
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Revocable trusts avoid probate court because a revocable trust can hold assets after someone passes away. An irrevocable trust is a trust that does similar things. They're created to hold assets but irrevocable trusts are created for various specific purposes. Sometimes they're created in order to minimize any estate taxes that might be applicable for the person who passes away. Sometimes they're used to hold property and keep it in the property for generations to come.
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They also can be used for asset protection purposes, for making sure that something that someone owns won't be subject to liens by creditors, or wouldn't be taken by the state in the event they needed to go to a nursing home. Now, revocable trust are the most common type of trusts. These trusts that act as substitutes for last wells and testaments are very flexible documents, but they offer no protection for the assets that are in there.
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So if someone creates a revocable trust and they put assets in there and then they're sued, or they need to go into a nursing home, those assets in that revocable trust are available to pay the creditors or to pay the nursing home. So there's no protection that comes with a revocable trust. But that doesn't mean they're not as valuable.
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In fact, they can be incredibly useful and valuable tools depending on your particular circumstances. So, for example, let's say that a farmer has a dairy farm. She owns this farm, she owns the land and she has livestock, and she has three children. Her oldest child works on the dairy farm with her. The middle child works in the city and it or computers, and the youngest is still in high school.
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It hasn't figured out what they're going to do yet with their life. Well, fair might think that it's a very fair situation if, in the event she passes away, her oldest child, who is also working the farm with her, inherits the farm, because, after all, they've been working the farm and helping her build value. When that entity. But she also has a child under the age of 18 and another child who she loves just as much as the other two.
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But their interests lie in other places. So how does she make it equal? Well, revocable trust may be a really great way of trying to make things equal. She can put her farm and her livestock equipment in bank accounts, vehicles, all of her assets into this revocable trust. And when she does that, she can decide that she wants her assets to be allocated equally.
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But instead of creating a circumstance in which her oldest, who works the farm with her, has to feel like they have to sell off assets in order to buy out their siblings share of their inheritance, she can make terms like the oldest child may work the farm and may receive the farm, but they're going to share some of the profits of the farm in order to buy out their siblings interests.
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This is also really valuable when you're talking about a young child, because anyone under the age of 18 can't legally inherit anything. And once that a child turns 18, that may not be when Farrow wants them to be able to demand one third of everything that they're entitled to under the trust. Because I think we all know that most 18 year olds don't wake up magically the morning of their 18th birthday, understanding everything there is to know about the legal world and how to manage money.
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So Fera can use that revocable trust to be able to put terms in place so that she can give her oldest child time to arrange for different options for financing, to consider their options, and carefully enter into a plan to take care of making sure everything is equal between all three of her children, but doesn't put the oldest in a position where they have to sell the farm in order to be able to make sure everyone gets their fair share.
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What's also great about a revocable trust is it's changeable and amendable. So as far as children get older, she may make changes to how these things will interact. Maybe she still leaves a time frame in place so that if the oldest is inheriting the farm, they have some time to put together financing options. Or maybe in the interim, the youngest child decided they wanted to work on the farm as well, and now Farrow wants to make sure that the youngest child has the opportunity to buy in or get a portion of the farm as well, since they are now a part of the making of the profits of the farm.
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Who knows, even in several years, the middle child who's working in it may come back home and be running the business aspects of the farm, and also be in charge. And the revocable trust will give Ferrer the flexibility to be able to go ahead and change the terms to fairly take into consideration how her life and her children's lives have changed as they've all gotten older.
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So that's great with a revocable trust, but it doesn't offer any protection. So now it's time to talk about an irrevocable trust and how an irrevocable trust offers that protection and irrevocable trust offers protection many times because you have to give something up. You may have heard the old adage to get something, you have to give something an irrevocable.
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Trusts are oftentimes something. You have to give up something in order to receive something back in return. So in the previous example, Fair Farmer has all this flexibility. She has the ability to change the terms. And while she's living and these assets are in her revocable trust, she's in charge of them and she has the ability to use them however she sees fit.
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But that's also why it has no protection and an irrevocable trust. Now, fair has to give up something in order for her to receive the idea of protection. So many times, an irrevocable trust is something where you can put assets, but you give up control of them. So instead of Pharah being in charge of how to manage her assets, she might need to name a different trustee or manager.
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Maybe she chooses her eldest, or maybe she chooses both her eldest and her middle child to be that trustee or to be that manager. But she's given up the ability to control those assets. That means that a fair decides later on that she's just going to sell the farm, because she doesn't think any of her children would be able to manage it, and she'd be in a better position because she gets a great offer for her to be able to transfer it.
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Well, her kids could tell her no, that's not a very comfortable position to be in. Having an opportunity where your children can tell you, no, you can't sell your stuff because we've decided we want to keep it and we're just going to make you hold on to it. Other concerns are that fair wouldn't be able to change it.
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Irrevocable means you can't make changes to the terms of the trust once it's put in place. So as a result, she wouldn't be able to take into consideration the fact that her now minor child may now be an adult and may now be a part of the farm. And now there are extra hoops that she has to jump through, not only to access her assets, but now it's really hard for her to go ahead and take those changes into consideration.
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So it may not be a good fit for Fara, even though it may have asset protection that goes along with it. Somebody may not be able to put a line on the farm if Fair runs over their prized cat, or someone may not be able to put a lean on the farm, or make fair to sell the farm in the event she goes into a nursing home, she still has to give up a lot.
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There also may be some tax consequences to doing that, because when you make a gift, oftentimes you can only give something that you actually own. So for example, if Pharah gives her land in trust, in irrevocable trust to her kids, then she now is no longer considered the owner. That means that if she's getting property tax discounts because of her age, or because she served as a veteran, she may lose those benefits because she's no longer considered the owner.
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It also could be an issue for her down the road if she did decide she wanted to sell, because even if her trustees were all on board and her children said yes, absolutely, we support you in selling the farm because Fair is no longer the owner. The irrevocable trust that she's not in charge of is the owner. She may lose her exemption that she's given by the IRS to sell her primary residence, and she may have to pay capital gains tax on the sale of her farm, even though it is in fact her primary residence, because she put it in an irrevocable trust.
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She doesn't have the same problems if it's in the revocable trust, because, again, she's in charge and the assets are considered hers. So she gets the protection of having her house in this irrevocable trust. But she gave up a tax exemption that may be very valuable to her if she decides to sell her house, or she doesn't have the protection, but she has control and the ability for her to go ahead and take those tax exemptions.
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If she decides later that it's better for her to go ahead and sell the farm. Now, that might be fair situation, but if you consider a different situation, an irrevocable trust may be incredibly useful to a different farmer in a different circumstance. If you have Gregory Gardner, who has a farm, has farmland that they're working with, their only child, they may decide that they want that farmland specifically to go to that only child, and they're not worried because that farmland has been in the family for generations that that farmland needs to be sold.
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And so somebody like Gregory Gardner, who may be in their 80s or even their 90s, putting something like that in an irrevocable trust for the benefit of their adult child who's been working the land and has the property right next door and plans on continuing to do this as their primary source of income for years to come. That actually may work to everyone's advantage in that case.
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In the event Gregory Gardner eventually needs to go to a nursing home. So every circumstance is very individualized, and it can be very different from farm to farm or from person to person. But an irrevocable trust is the one that offers the protection, and a revocable trust offers lots of benefits. But there is absolute no asset protection for the person who creates it because it's still considered their stuff.
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I hope you found this information helpful. It should not substitute for good legal advice, and you should seek your own advice from your own attorney about your particular circumstances. Thank you very much and have a great day.
