Forming a trust as part of your succession plan may help you accomplish the following goals, though not every type of trust will achieve all of these goals:

  • Transfer property to your successors without probate,
  • Create a succession plan but allow you to maintain control and use of the property during your lifetime,
  • Transfer your property while allowing you to control the future use of the property after you have passed,
  • Avoid estate taxes,
  • Manage assets so that you are eligible for Medicaid, or
  • Allow for your business assets to continue to be passed down for generations to come.

Read this section to determine what type of trust will help you accomplish your specific succession goals.

The previous section outlined why trusts, generally, can be beneficial to the disposition of business assets. Above, we’ve reiterated what goals various trusts can accomplish. Not all trusts will achieve all of these goals. But, if any of these goals align with your own,  you need to know more about trusts to know which will best suit your needs.

We discuss three of the most common types of trusts below. For each type of trust, we show which goals it can accomplish, its drawbacks, and how it functions as part of a business succession plan. The three types of trusts we will discuss are (1) revocable living trusts, (2) irrevocable living trusts, and (3) testamentary trusts.

You’ll notice that the trusts listed above share some words in common. So, before we start, let’s define some shared trust language. First, notice that trusts can be “living” or “testamentary.” These words refer to when in the creator’s life the trust is activated, or when it starts functioning as a trust. Living trusts become effective at the time of creation, during the lifetime of the person creating the trust. On the other hand, testamentary trusts are only activated after the creator dies.

Secondly, trusts can also be “revocable” or “irrevocable.” The difference between these types of trusts boils down to the power the trust’s creator has to alter or dissolve the trust. The creator of a revocable trust can change their mind about the property it holds or who the beneficiary is. On the other hand, the creator of an irrevocable trust has no such power. Once a person creates an irrevocable trust, it cannot be rescinded (though minor modifications could be possible with court involvement). All trusts eventually become irrevocable when the trust’s creator passes, so this difference is only relevant during the creator’s lifetime.

Revocable Living Trusts

What is a Revocable Living Trust?

Revocable Living Trusts are likely the most common type of trusts used in succession planning as a whole. They can help you accomplish the following goals:

  • Transfer property to your successors without probate,
  • Create a succession plan but allow you to maintain control and use of the property during your lifetime.

These trusts provide two of the possible benefits of trusts: avoiding probate and allowing a measure of control over the future use of the property in the trust.

Avoiding Probate

The revocable living trust’s property will not go through the probate court process. (Recall how all trusts must be “funded,” which is the word for transferring property into the trust.) No judge will need to oversee the distribution of the property. Your executor (who carries out a will) will not have to file an inventory of the trust assets to the court. No documents about the trust property will be public record.

Of course, some administrative actions will need to be taken once the trust’s creator passes. The person appointed as trustee will be responsible for this process, but the court will not be involved.  If there is an issue with the trust administration, the burden is on the beneficiaries to raise a claim against the trustee.

Avoiding probate means the transition of the property titled to the trust is more streamlined and efficient. The trust’s beneficiaries can immediately reap the benefits of the property instead of waiting for a court process that can take up to a year to resolve.

However, any property not titled to the trust (meaning, not put into the trust properly) will still have to be sent through probate.  This could be property mistakenly or intentionally left out of the trust. Farmers can protect any assets they may have unintentionally left out of the revocable living trust by using a pour-over provision in their will. This clause automatically diverts any property inadvertently left out of the trust into the revocable living trust at the creator’s death.

To be clear, most estate plans include both a will and a revocable living trust (among other things!). So, choosing between a will and a trust isn’t cut and dry. However, which tool you use to give away your assets will determine if probate is a part of the process. For assets you do not want to go through probate, the primary tool you should consider is a revocable living trust. Read on for more benefits and the limitations of these types of trusts.

Maintaining Control During Your Lifetime

As its name implies, a revocable trust can be modified or revoked at any time during the lifetime of the trust’s creator. In fact, during the creator’s lifetime, she can serve as the creator, the trustee,  and the beneficiary of the property in a trust! From the creator’s perspective, the only thing that changes is their legal relationship with the property. The trust now holds the title to the property or the paperwork indicating its formal ownership. However, the creator still directs what happens to the property (as the trustee) and still has access to and benefits from the property (as the beneficiary). The creator of the trust can add or remove property to the trust as they see fit as long as they are alive to do it. This is unique in the world of trusts.

Creators of revocable living trusts retain control over the trust assets. If the asset in the living revocable trust is farmland, then the trust creator can continue to use the property as they choose. To prepare for the future, the creator would, typically, appoint a ‘successor trustee’ and ‘successor beneficiary(ies).’ If the revocable living trust is still in effect at the creator’s death, then its terms become fixed, and the assets in the trust are transferred automatically and easily (avoiding probate) into the care of the previously appointed trustee and for the use of the previously appointed beneficiaries.

Control Over Future Use

The terms of a revocable living trust can allow the creator of the trust to reach into the future and control the use and management of the assets in the trust. Once the creator dies, the terms, trustee, and beneficiaries of the revocable living trust become permanent or irrevocable (as the creator has passed and can no longer revoke the trust or change the terms). This might seem like an obvious point, but it means that the state of the trust at the creator’s death will dictate the future management of the assets in the trust.

Trust creators can add terms to the trust to say, for example, that any farmland in the trust must be managed as a farm for a number of years. One person could be given the option to purchase or lease the farmland. The trust creator could dictate particular management techniques in the terms of the trust (though this might not be advisable as management techniques can shift through the years, and what appears beneficial now might no longer be considered helpful in the next generation). The possibilities are vast, so it is advisable to retain an attorney to help draft a trust that meets your current and future goals.

Revocable Living Trusts and Farm Succession

Revocable living trusts would typically be used in farm succession plans to ensure the ease of transition of farm-related assets at the farmer’s death. The cost and delay of probate could disrupt operations and create opportunities for disputes to arise. If the farm assets being passed on are in a revocable living trust that becomes permanent or irrevocable at the creator’s death, the ownership transition will be immediate.

Be aware that if a business’s assets are to be titled to a trust as part of an estate plan, a business owner must first consult the business’ governance document, if one exists, to determine if such a transfer is allowed. If it is, there might be particular steps the owner needs to follow outlined in the governance document. Be sure to follow those!

Revocable living trusts are effective for the retiring farmer looking to allow a successor to use farm assets after the retiring farmer’s death. The aspiring farmer will not need to pay for the assets, nor will the aspiring farmer outright own the assets, but they will be able to use and benefit from them.

Of course, the trust creator could direct the successor trustee to go ahead and distribute the trust assets upon the creator’s death. That way, the assets become the property of the beneficiaries (or some other named party). One beneficiary could be given an option to purchase the farmland and equipment at a fair market value or discounted price, allowing the proceeds from the sale to flow to the other named beneficiaries. There are myriad options. Farmers need to formulate a plan and then get legal advice on crafting the trust to meet their goals.

Irrevocable Living Trusts

What is an Irrevocable Living Trust?

An irrevocable living trust can help you accomplish the following goals:

  • Transfer property to your successors without probate,
  • Transfer your property while allowing you to control the future use of the property after you have passed,
  • Allow for your business assets to continue to be passed down for generations to come,
  • Avoid estate taxes or
  • Manage assets so that you are eligible for Medicaid.

Irrevocable Living Trusts are relatively rare despite the longer list of benefits outlined above.

The reason why they are rare is right in their title–because they cannot be revoked. Furthermore, the creator, trustee, and beneficiary(ies) must all be separate individuals in these trusts. So, the creator effectively gives up their current rights to control any assets in the trust. An excellent way to think of an irrevocable living trust is as a gift. The creator gives away the assets, and this gift cannot be undone.

Irrevocable trusts are truly separate from their creators, so much so that the irrevocable trusts must file their tax returns. Achieving all the benefits listed in the box to the right requires an almost absolute sacrifice of the rights in the trust property. In fact, the terms of an irrevocable trust are difficult to change even after the creator’s death. They are the most final of the trusts.

Avoiding Probate

Since the creator of the irrevocable trust has given up nearly all rights in the property given to the trust, there is no need for probate. The property in the trust is no longer part of the creator’s estate–that property has already been distributed when the trust was created. An irrevocable trust is similar to deeding away property–it has already been passed on and will not need to be part of the property transfer at death.

Control Over Future Use

While the creator of the irrevocable living trust has given up ownership and access to the trust property, the creator has not given up the ability to control the future use of that property. However, the creator must exert all this control when she creates the trust. This control comes in the form of the type of trust made and the provisions governing the trust.

The creator of an irrevocable trust could set up a prescribed way that farmland could be used or transferred between heirs or chosen successors. For example, the trust creator could require that an on-farm heir or successor always have a protected right to farm the land, even if there are other trust beneficiaries. Or, the trust creator could provide a farming successor with a long-standing option to purchase the farm property at a reduced rate. In this way, a farmer who has relinquished all property rights to the farm can still help steer that farmland’s future use and ownership.

Tax Planning Over Multiple Generations and to Avoid Estate Taxes

A specific type of irrevocable trust can transfer assets through several generations. The so-called ‘dynasty trusts’  are only subject to taxes during the initial trust funding process. Then, as long as the trust exists, future generations can benefit from the trust assets without worrying about estate or gift taxes. Note some states cap how long these types of trusts can exist.

Some people use irrevocable trusts to give away assets so that their estates will not be subject to estate taxes at their death. Estate taxes are only levied against very wealthy individuals. Irrevocable trusts break the ownership tie between the creator and the assets. Therefore, those assets (now owned by an irrevocable trust) will no longer be attributable to the trust creator. The trust assets will not be used to calculate the value of the creator’s estate. If funding an irrevocable trust reduces the creator’s estate below certain thresholds (in the multi-million dollar range), then that estate could avoid estate taxes.

Note that transfers into an irrevocable trust can trigger the gift tax. If the value of the assets transferred into the irrevocable living trust exceeds the annual exclusion amount for gifts, then the creator will be subject to the gift tax. Gift taxes only apply to the person donating the gift, not the recipient.

See Chapter 4 of this guide for more information on estate and gift taxes.  

Medicaid Eligibility

Irrevocable trusts can also remove assets from a person’s estate for a different reason– to help that individual qualify for Medicaid. Since the assets in an irrevocable trust aren’t attributable to the creator any longer, the value of those assets will not impact the creator’s eligibility for Medicaid. However, timing is critical if the farmer wants to be Medicaid-eligible. Generally, transfers made within five years of applying to Medicaid will not be considered transfers. That means any assets the farmer gives away five years before the Medicaid application will count towards the value of one’s estate. Asset transfers must occur at least five years before applying for Medicaid. Only two states have a shorter “look back” period–California and New York.

See below for more information about Medicaid eligibility.

Testamentary Trusts

Testamentary trusts are established by their will after the creator’s death. A common use for these trusts is to hold family property if both parents were to die unexpectedly. Often, these trusts are set up to consistently disburse funds to minor children until they reach a particular age, when they will gain access to the funds or property in the trust. These trusts aren’t even funded until the death of the creator. For this reason, testamentary trusts don’t have benefits for the trust’s creator except for the peace of mind that their property would be safeguarded in the case of an unanticipated death.

For example, property entered into a testamentary trust must go through probate. The will creates these trusts, so the probate court process is necessary. Typically, testamentary trusts expire at a particular time or due to a specific event, for example, the beneficiaries reaching a certain age. However, these trusts are more economical –they do not cost as much to create or maintain.

Medicaid Eligibility

Medicaid is a jointly funded state and federal program to provide health care coverage for individuals with low income of all ages.  The federal government oversees the program, but each state administers its own program, so rules and available benefits can vary from state to state.

Medicaid is often confused with Medicare. Medicare is health insurance reserved for individuals aged 65 and older or younger with certain disabilities or conditions. This program is exclusively federal, so a person’s insurance coverage under this program will not vary from state to state.

Medicaid is sought after because it covers long-term care for those who are seriously ill or disabled and can no longer perform everyday activities on their own.

Many aging farmers are caught in a situation where, on paper, they have a fair amount of assets or total worth. In reality, their wealth is in their land, which they do not want to liquidate or sell to pay for health care costs at the end of their lives. To make the situation more complicated, farmers work very hard their entire lives but often haven’t earned enough to receive sustainable Social Security benefits upon retirement. Retirement planning isn’t standard on small owner-operator farms, either. This leaves many aging farmers struggling to pay for long-term care, whether in-home or at a nursing home.

For these reasons, many aging farmers rely on Medicaid for end-of-life care. There are many complications, though; the most pressing are the low-income and resource requirements determining eligibility. For this reason, without long-term care insurance or other financial resources, many farmers have limited options to pay for their long-term care. Farmers sometimes have to sell farmland to pay these costs. There is another option, though; trusts are a crucial tool to help protect farmland.

Eligibility

First, let’s look at what qualifies as “low income” for Medicaid purposes. Eligibility rules will vary by state. See the chart below for eligibility limits for institutional or nursing home Medicaid for a selection of states in the Northeast U.S.

Remember that there will be limits on what one’s monthly income can be and the total assets or resources possessed by the person who wants to apply for Medicaid.  Wages, Social Security Income, disability, or veteran benefits will be added to calculate monthly income.


Exemptions to Asset Calculations

The asset limits are for countable assets, which include bank accounts, retirement accounts, stocks, bonds, cash and anything that can be easily turned into cash.

Some assets don’t count toward these asset limits. What a relief! If the Medicaid recipient continues to live in their home or plans to return to their home, then the home will not be counted in the asset tally. However, that home must not exceed equity limits. Home equity is the home’s fair market value minus any outstanding mortgage or debt. So if a Medicaid recipient who will continue to live at home and receive in-home care has a home valued at $450,000 with $100,000 still owed on the mortgage, then the equity value is $350,000.

However, one’s land, livestock, equipment, and the operation itself could be counted and may disqualify a farmer from Medicaid eligibility.  What if you’ve leased your farmland and rely on that income to support yourself? That income will count against your eligibility for Medicaid.  Checking and savings accounts, stocks and bonds, and secondary motor vehicles are examples of other ‘countable assets’ that will be considered assets in the Medicaid eligibility calculations. States will have specific exemptions to what can count towards Medicaid eligibility.

Look-Back Period

Giving away one’s assets is not a surefire solution to this problem of Medicaid eligibility. That’s because of what is called the “look-back period.” When calculating one’s assets for their Medicaid application, any gift transfers or transfers of property below market value in the five years before the application are considered and can result in a penalty. A farmer cannot simply gift the farm to heirs in 2024 and expect to qualify for Medicaid prior to 2029–five years from now. This rule requires that farmers planning on gifting or selling assets at a discount price begin their succession planning many years before they want to take advantage of Medicaid or expect to need it.

There are two states where the lookback period is shorter than five years. Those states are California and New York. In 2026, California will no longer use a look-back period, which is currently 2.5 years, or 30 months, and is limited to Nursing Home Medicaid. New York used to have no look-back period for community-based care, but a 2.5-year look-back period for that care will be implemented in 2024 or 2025.

Estate Recovery & Medicaid Liens

Those who receive Medicaid are subject to potential Medical liens, sometimes called estate recovery.  This happens if the expenses exceed the monthly Medicaid allowance. Nursing facilities can place a lien on farmland and recoup nursing facility costs when the property is sold. This repayment can occur while the person receiving care is still alive or after they have passed. Again, the rules governing this process are state-specific.

Other Trusts & Estate Planning

Many estate planning attorneys will recommend using trusts to shield assets from Medicaid asset calculations. However, for these transfers to trusts to be effective, they must be completed at least five years before Medicaid is needed. Of course, farmers won’t know for sure when they will need  Medicaid assistance. This uncertainty can force farmers into an earlier-than-desired decision about when to give up control of their farmland and other assets.

Only irrevocable trusts created during a farmer’s lifetime will help with Medicaid eligibility.  In order for a property to not be considered your property any longer, it must actually no longer be your property. The farmer creating this type of trust will not be able to control the trust property and won’t be able to access the income the trust creates. The beneficiaries of the trust now hold those rights.

Conclusion

There are many other types of irrevocable trusts that are outside the scope of this guide. You may have heard of spendthrift trusts, Miller trusts, spousal trusts, marital deduction trusts, life insurance trusts, or charitable remainder trusts (among others!). A knowledgeable attorney will help guide you to the specific type of trust that will most benefit your situation. However, review the following worksheet to begin to orient yourself to the basic trust options.

Writing Instrument Needed Ahead: For this next exercise, you will need pen and paper or a blank word document.

Try this: Which Trust Fits Your Goals? (Freely timed or ~20 minutes)

Assuming you want to gift your farm assets to your chosen successor, either in whole or by allowing them to use the property while someone else manages it, we know a trust is the primary vehicle to help you achieve this goal. Now, the only question is, which type of trust?  To help you determine which trust is best for you, we’ve prepared a series of questions.

  1. How much do you want to invest in a succession and estate plan? 
    • A few considerations: The Testamentary Trust is the most economical. The Revocable Trust requires more maintenance. The Irrevocable Trust requires more preparation time with a skilled attorney to ensure the choice is correct.
    • The level of finality and complexity of the trust will increase its cost and maintenance requirements. Determine what resources you can put toward creating and maintaining the trust.
  2. How much control do you want to exert over the property in the trust? What is it that you want to control?
    • The most amount of control: Revocable Trust
    • The terms of the trust can exert some control on how others use the property: Irrevocable Trust and Testamentary Trust.
    • Remember, if you want to retain control, there are a lot of benefits you have to give up on–like Medicaid eligibility or estate tax planning. Make sure to balance all factors!
  3. Are you ready to hand over ownership of your property? Why or why not?
    • Trusts where ownership is retained in the trust creator – Revocable Trust* and Testamentary Trust* (*until the creator’s death).
    • Trusts that require ownership to be given up completely – Irrevocable Trusts.
    • Succession is a difficult project! Retiring farmers might want to hold onto their property for a variety of reasons and may not be ready to cede ownership to a successor, even in a trust. Other times, this action will be absolutely necessary to help the retiring farmer become eligible for Medicaid or avoid estate taxes.

Tips for Moving Forward

Exploring these questions is very important at the beginning of your succession plan. Clarifying your vision and goals will be helpful when you begin to work with professionals. After reading this section, there are a number of things you need to look into, do, or have conversations about. Here is a partial list of action items for you to consider; add your own action steps at the end. 

  • Review retirement resources available to pay for my needs during retirement and any potential need for long term care.
  • Determine if my estate is at risk of being taxed at my death (account for any upcoming, predicted changes to estate tax laws and your state’s laws, too).
  • Create a timeline for when the retiring farmer would be comfortable relinquishing ownership of farm assets.
  • Consult with an accountant or financial advisor to fully understand the tax consequences of transferring any property into trust.