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how do trusts work
Old 06-19-2007, 06:24 PM   #1
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how do trusts work

I have a father in law who is a farmer and he has accumulated an estate approaching 10 million of which 80% is farmland the remainder cash, cattle, equipment etc. He formed an "S" corp decades ago and issued a small amount of stock to his wife, slightly larger amount to my wife, and a slightly larger amount to my wife's brother. None of us live on the farm or intend to farm. His wife is in an assisted living facility with my wife as guardian.

He has created a trust for the corporation which has almost all the assets. His will leave half of the trust to my brother inlaw and half to my wife. They have freedom to hold, sell, rent or do anything else they want after his death.

My wife and I have no experience at all with trusts and would apprieciate some guidance on how they work. Will we all have to sell our S corp shares, then each sibling recieve 50% of the trust, or will my brother inlaw have control after the trust takes effect due to his having 1 more share of the corporation prior to my FIL's death? What arrangements will be required by law to care for my mother inlaw should she outlive him? As I understand it the trust is established to avoid probate so will that mean his wife will be entirely dependent on her children for her care the rest of her life? I am sorry if this isn't specific enough for an intelligent reponse, I am really on new ground here. Perhaps a general primer on estate trusts from this board will help point me in the right direction.
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Old 06-19-2007, 06:36 PM   #2
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Check out the Wikipedia writeup

S corporation - Wikipedia, the free encyclopedia

the links should have additional information

I also found this diagram to be helpful in distinguishing between S and C corporations and to Limited Partnerships and Limited Liabilty Companies (LLC's)

Johanson Berenson LLP :: Primer on Basic Forms of Business Ownership
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Old 06-19-2007, 06:44 PM   #3
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When you refer to the trust, are you referring to the S-Corp or is there a separate trust that holds the S-Corp shares for the son and daughter ?
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Old 06-19-2007, 07:19 PM   #4
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Quote:
Originally Posted by murg View Post
I have a father in law who is a farmer and he has accumulated an estate approaching 10 million of which 80% is farmland the remainder cash, cattle, equipment etc.
Since the wife is in assisted living, I'm going to make the assumption that he is also a bit older. That means that someday sooner than later, your wife will get around 4 million minus taxes. I'd say that that qualifies for enough to be worth a few thousand in lawyers fees to make certain that you understand the legal ramifications.

My father is a trust/corporate attorney, and every time I ask questions like these (I'm a curious person), he always says "Well, that depends..".

So no matter what you read, and what we may say on the matter, it will always depend on the wording of the trust, the ownership of the S-Corp, the wording of the will, the state they're in, etc.

Anyway, I'd suggest that you find a reputable lawyer who can read the documents and let you know what it means for your family. With that much money at stake, it's probably a good idea.
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Old 06-19-2007, 08:10 PM   #5
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I agree with Ceberon. We don't have enough information to give you much guidance. The estate tax situation is complicated, especially as it is a farm. The situation with his spouse is complicated. (She may have some rights just by virtue of being his spouse, no matter what the will or trust says). What state you live in makes a difference. Also, IIRC in most states it wasn't until relatively recently that trusts could own S corporation stock, so I am unclear how the ownership of the farm is structured.

That said, as a very simplified hypothetical that may very well not fit your situation, say your wife owned 10 shares of stock in the corporation, her brother owned 20 shares, mom owned 6 shares, and the trust owned 64 shares. Assume that the trust provided that each sibling would own half the trust's shares upon the death of dad. The trustee of the trust could distribute the shares to the two siblings. This would leave brother with 52 shares, mom with her six, and your wife with 42. Unless there is a shareholder agreement to the contrary, your brother would have voting control for votes that only required a majority. Some votes, depending on the state's law, may require more than a simple majority. Some states provide protection for minority shareholders of small corporation if the majority shareholder does not act fairly to the minority shareholders.

But we do not know what the trust says, what any shareholder agreement says, and we don't really know how the ownership of the farm is structured. We also don't know your state and its laws. So, you need to sit down with Dad and his lawyer and ask how it all will work.
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Old 06-19-2007, 09:14 PM   #6
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I'll add that when I have done succession planning for small businesses I would do a shareholder agreement that addresses voting and control issues, what happens if someone wants out but others want to stay in, what happens when someone dies, etc.
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Old 06-20-2007, 06:40 AM   #7
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As Cerebron says, you need to see the trust and see a lawyer (at some point). That said, I doubt your FIL has left his wife completely at the mercy of the kids. DW and I have a common type of trust set up. When one of us dies our half goes to the kids in trust with the surviving spouse as trustee. The surviving spouse can use the proceeds of the trust to take care of herself as she (or me as the case may be) sees fit. Upon her death it goes to the kids. The purpose is to avoid the whole pile going to one person and kicking in estate taxes. If your FIL has something like this setup he must have designated someone to take care of MIL since she sounds like she isn't in a position to deal with it. He would probably have it set up so her share goes into trust in the same manner if she dies first. We also have a so called "bimbo" clause in there so the kids can't loose it to a neer-do-well spouse later in case of divorce.
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