Q: We’ve read in your past columns about how you use a ‘life estate’ rather than a trust for owning property and possibly protecting it from Medicaid under the five year look-back rule. We have a slightly different problem in that our farming child married late in life and married a gal with two kids from a prior marriage…

Our son was never married before and has no children of his own.  We have other children who do have children, our grandchildren, but we don’t want to give the land to our farming son and, if he should die or get divorced, have this land go to her two children and out of our family name? What should we do? – Second Time Around.

Dear Second Time: You do have what used to be considered a unique situation. These days, however, with marriages ending in divorce close to fifty percent of the time, many families consist of yours, mine, ours of any number of combinations and, in estate planning, it can throw some real loops at you.
For example, if your son were married to this woman and he adopted these children, they become legal heirs of his and, therefore, possibly your estate for whatever property he might inherit.
However, if he doesn’t adopt – and they remain stepchildren – they are not legal heirs – unless you name them in your will.
There are two solutions for your problem regarding your farming son and your daughter-in-law with no bloodline heirs.
One, you can set up a trust in your will – called a testamentary trust – where the trust does not come into existence until your death. At your death, the trust is created, your named trustee(s) are put in charge of the assets, and the trustees are charged with handling the assets based on what you told them to do in your trust verbiage.
You might say your farming son has the full use and income from the assets of the trust, and the rent would be the land taxes, upkeep of the property and any other expenses incurred with owning the property – insurance on buildings, utilities, etc. In a sense, he would have the full use of the property just as if he owned it with a couple notable exceptions.
He cannot borrow against or collateralize the property because he doesn’t own it. He can’t direct the sale of the property nor can he direct the assets of the trust as, again, he doesn’t own it. He can build on the land, but upon his death, the farm buildings would become a part of the trust assets and not his heirs.
You might even state upon his retirement, all rental income derived from the land would go to him less the aforementioned expenses.
Ultimately, though, if he doesn’t have any children of his own, these assets will then go back to your other children or bloodline grandchildren upon his death. During his lifetime, he will have full use and enjoyment of the property, however, upon his death – if he has no issue – the assets would then be passed to your bloodline heirs – children and grandchildren.
Some people might find this too harsh and state in their trusts ­– “if Jr. is still farming at the age of fifty-five or sixty, then he shall receive these assets as we feel he has earned them by then.” You can also do this with an earlier age but with some caveats – such as if Jr. receives the farm at age forty-five, he must own and ‘actively participate’ the farm for more than ten years before he can sell the property. If he sells or rents out the property prior to the prescribed age, then his non-farming siblings will be able to share in the bounty of the sale.
We can also accomplish this with a ‘life estate’ although the verbiage is a little more complex as I’m actually transferring the deed to the farming son – or to the farming son and the non-farming siblings. But you can state the same number of conditions on a life estate deed as you do a trust, and upon your death, it’s up to your farming son to clear up the caveats with his siblings before he has full ownership of the property. This might mean ‘actively farming for ten years’ or ‘no sale of property until age sixty’ or any number of things. In order for him to have ‘clear’ title to this land, he’ll have to meet your restrictions.
In some cases, where we have second marriages, we also add the caveat that this property cannot be brought in to any divorce proceedings when accounting for assets values to be split. In this case, I would then also have my daughter-in-law sign the transfer forms, thereby having her agree to these terms. If the two of them split up in years to come, she can’t come back and say she owns half of the farm because she agreed to those terms of transfer at the time he received the property deed. This is a post-nuptial agreement, and to be sure it stands up, your daughter-in-law should take it to another attorney to receive advice on signing the deed. Of course, you always have the option if she doesn’t want to sign it, you don’t have to transfer it.

Do you have questions about estate planning? Need to know more about how you can  “Keep the Family Farm in the Family”? Contact Michael Baron at 800-373-4078.