"All of our children have left the farm and now we are renting the land out. However, we have some concerns about how the children will handle the land upon our death,” said Bill.
"It's not just our kids we worry about, but some of their spouses weren't raised on the land like our children were, and we worry what happens if one of our children dies and leaves the land to their spouse, or gets divorced. What happens then?” Josie asked.
This exact situation arises in every single estate planning case when you have married children–whether they are on the farm or not. It is also the most overlooked aspect of estate planning.
First of all, one has to understand the laws regarding marriage and inheritances. In most states, property owned by one spouse is deemed to be owned by both of them in some part. This would include any inheritances received by either spouse.
The codified law, of most states, says that upon death or dissolution of the marriage, both partners are entitled to fifty percent of the entirety of the net estate value–even if one of the spouses states in their will they'd like to see the property they inherited from their parents pass to their children rather than to their spouse. The surviving spouse still has marital rights and can claim fifty percent of the decedent spouse's estate.
Even if the surviving spouse does let the property pass to the children, if the children are minors, the surviving spouse would be their guardian and, as such, still in charge of the property until the children turn age eighteen. In essence, still under his or her control and could be sold, changed or titled differently if they chose to do so as financial guardian.
“I trust my son-in-laws and daughter-in-laws,” said Josie. “I think they would do what's best for the children.”
I always nod my head and agree with them. "Of course, you trust your in-laws–they're the parents of your grandchildren. However, imagine for one second your child is gone and now your in-law comes home with a new husband or wife. Knowing what you know about marital rights, do you realize their new spouse now has the same rights as they once did? That they now own fifty percent of the estate you left behind for your family?”
Now the lights start coming on in Grandpa and Grandma's eyes when they understand the implications of how property passes from generation to generation and how the act of marriage can divide that property instantly.
"So how do we protect the property from our in-laws–not that we don't love them–but we don't want to see our farm get divvied up this way when we die,” said Josie.
"I've seen other people use either a testamentary trust or an irrevocable trust with a life estate deed,” I replied. "As I understand it, the testamentary trust is put into your will so that upon your death, instead of the property passing directly to your children, it goes to a trust created by your will. This trust does not exist until you die or both of you die and only then comes into existence. You can have the property held until your children reach the ages where they are past having divorces, or still have minor children–say age fifty or fifty-five.”
"In other cases, where people want to have their property protected during their lifetimes, I've seen where they set up an irrevocable trust today–only with a twist. The irrevocable trust is created today but only to hold the residual deed while Mom and Dad still keep a life estate interest in the property. This qualifies for the five year look-back period. Upon their death, the property rights–income and use–are passed to the trust and subject to the same terms as the aforementioned testamentary trust.”
"In other words, the only way to truly protect your property from what may or may not happen in your children's lives is to put it away into a safe place until they are of the age to manage, own and control the property.”