Trusts can play key role in farm estate planning

Although trusts will not be of use to all producers, they will meet the needs of some, says Joel Bokenfohr, manager for business structures and financial policy with Alberta Agriculture and Colin Miller, developer of trusts in farm transition planning. 


A trust is a relationship between parties with interconnected rights and obligations. These parties include the settlor, the trustee and the beneficiary. 


The settlor transfers property to the trustee, to be held for the benefit of the beneficiaries. 


The trustee is the legal owner of the property, and is so registered at the land titles office. The beneficiary, while not the legal owner, is eventually entitled to the property and is known as the beneficial owner. 


A possible use of trusts within agriculture would be to protect a person who might not have the ability to look after themselves, such as handicapped or disabled children, Bokenfohr says. 


Another scenario might involve a second marriage that could directly affect farm succession. 


Originally, spousal trusts were used to provide for the management of an estate for the benefit of a surviving spouse, who might lack the skills to manage investments.


Today, a surviving spouse has access to a vast array of resources to assist in the investment of assets and in a less patriarchal society is deemed capable of the management of an inheritance. However, there are some scenarios where the use of a spousal trust is prudent. 


The second marriage is one of these. If the entire estate is willed to the surviving spouse and they remarry, there exists the possibility that on the death of the surviving spouse the assets could pass to his or her children rather than the children of the first marriage. 


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On the other hand, the spousal trust allows the assets to be held for the life of the second spouse with all of the income paid to him or her for life. There is usually a power given to the trustees to encroach on the capital in the event the income is not sufficient or in case unusual circumstances arise. On the death of the spouse, the amount remaining on trust can be transferred to the children of the first marriage. 


The spousal trust ensures farm property passes to the farming child upon the death of the surviving spouse.


Otherwise, if the spouse remarries and leaves the entire estate to the new spouse, the farming child has no recourse other than to commence an action in unjust enrichment for the labours spent on the farm.


If the spouse does not trust the surviving spouse to leave the farm to the farming child, a spousal trust ensures that the land passes to the farming child upon the death of the surviving spouse. The trust could provide that the farming child be allowed to rent the land at fair market rent for the life of the spouse and that the land then be transferred to the child on the death of the spouse. 


Other scenarios when a spousal trust might be used include the case of a spendthrift spouse, such as a compulsive gambler, or an incapacitated spouse. 


Trusts can be used for creditor proofing. The property does not belong to the trustee and cannot be claimed by the trustee’s creditors. If the trustee goes bankrupt, he or she is replaced and the trust continues. At the same time, the property does not belong to the beneficiary until it vests absolutely in his or her name.


Trusts can be used for income splitting and for confidentiality. The name of a beneficiary need not be disclosed and with a discretionary trust, the decision as to what beneficiary should inherit which asset, and in which proportion, can be postponed to a future date.


In this case, the trustee can be given the discretion to determine which beneficiary receives the property. 


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Discretionary trusts can also be used to protect assets in the event of marriage breakdown. In a situation where parents want farmland to transfer to their child but are concerned about the child’s marriage, a trust can be used to help protect the land from a matrimonial claim. The land can be transferred to a trust for the benefit of the child (and other beneficiaries), but since the child would have no interest in the property, it would not normally be considered matrimonial property. 


This is probably best done before a marriage, says Bokenfohr.


“Every family is different. If it is a strong concern, let’s say there’s no one in the picture, but a concern someday, it is something you can do, but there are other tools.”


In some provinces, giving the land as a gift would serve the same purpose but not in Saskatchewan, where generally gifted land is seen as part of the jointly owned property. In Alberta, the value of the gifted property on the day it was gifted would stay with the child but accrued value would be part of the settlement, he says.


“It gets back to what you want to accomplish,” says Bokenfohr. “We do see them where people want to keep their assets together for quite a long time but it is quite a tax burden when you get to the 21-year mark. A trust is deemed to have sold all of its assets every 21 years, thus giving rise to tax on any capital gains unless the trust is wound up beforehand. This does not apply to spousal trusts. “


“Trusts are a way to keep farm assets together, but you must be a little careful — you’re not ruling from the grave, so to speak.”


Other mechanisms might work better for farmers, he says, such as pre-nuptial agreements or shareholder’s agreements in a farm corporation, which would protect the amount of money that could be taken out of the farm within a year.

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