Inheritance: Trust with Land + Investments - 3 Heirs

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ef11
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Inheritance: Trust with Land + Investments - 3 Heirs

Post by ef11 » Mon Jan 22, 2018 11:11 pm

Hello to all,

First of all, we are planning to seek professional advice on this topic in the near future, but wanted to get any opinions or information I could in the meantime. For tax purposes all heirs reside in TX and the Trust was formed in TX.

The inheritance consist of a Trust that includes:
- 120 acres of land, being used for agricultural use currently. Annual income/expense from this land is negligible. In our family for > 100 years, so not really looking to sell and distribute at this time.
- A taxable brokerage account
- The trust is to be split between my aunt, my brother, and myself.

We are trying to understand the best "entity" to house these assets i.e. S Corp, LLC, Partnership, etc.

The main taxable event from the Trust assets will be the sale of this land at some point in time for a potential large capital gain vs. the cost basis we inherit today. We would then more than likely want to "dissolve" the corporation and distribute the assets to the three heirs. In summary we are trying to understand the best entity that will allow for the sale of land at a large capital gain and distribution of those assets to the heirs in the most tax efficient manner possible.

General Questions:

1. On the surface a corporation that does not pass through income to the owners (so not an LLC) seems to be the best option with an ~22% corporate tax rate going into effect. Thoughts?

2. If the land was sold for a large capital gain while part of the corporation, I envision we would pay corporate income tax on the gain. Once the land is sold, we could then dissolve the corporation and distribute cash to the shareholders, is this a taxable event where we then pay ordinary income tax?

3a. Can the investment account be considered a corporate brokerage account and also pay corporate income taxes on this account vs. personal?

3b. IF it can be part of the corporation, can it be split up into three accounts for each of the three partners so we can control our own investments?

Thanks for any help and please let me know if you need any additional information.
Last edited by ef11 on Tue Jan 23, 2018 11:02 am, edited 1 time in total.
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J295
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by J295 » Mon Jan 22, 2018 11:21 pm

Factual question… If this is an inheritance, why wouldn’t there be a step up in basis on the inherited assets, including the land?

123
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by 123 » Mon Jan 22, 2018 11:40 pm

What plans do the 3 of you have if the value of the land significantly declines? Would a sale occur if it goes down by 25%, 50%?

How much of their respective net worth does the present value of the inheritance add for each heir?

Why not just liquidate the inherited assets and distribute cash to each heir?
The closest helping hand is at the end of your own arm.

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Watty
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by Watty » Tue Jan 23, 2018 12:39 am

ef11 wrote:
Mon Jan 22, 2018 11:11 pm
The trust is to be split between my aunt, my brother, and myself.

No answers but one more question to put on your list.

Be sure to know what happens if one of you dies since that could greatly complicate the situation and depending on how the trust details their share be distributed in some unexpected way.

scifilover
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by scifilover » Tue Jan 23, 2018 9:22 am

What kind of trust is it? Are you weighing these decisions because of the death of the Trustor? If the Trustor died and the trust assets are to be distributed to the beneficiaries, what does the trust say about how the distribution is to take place?

Regarding the land.....is it currently being rented or farmed? Is there a contract between the trust and the farmer/tenant?

Need to sit down with trustee and get his/her input on your options....

ef11
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by ef11 » Tue Jan 23, 2018 11:01 am

J295 wrote:
Mon Jan 22, 2018 11:21 pm
Factual question… If this is an inheritance, why wouldn’t there be a step up in basis on the inherited assets, including the land?
There is a step up basis yes. We are not looking to sell this property now and are trying to understand how to best prepare for a potential sell over the next 5-30 years.
123 wrote:
Mon Jan 22, 2018 11:40 pm
What plans do the 3 of you have if the value of the land significantly declines? Would a sale occur if it goes down by 25%, 50%?

How much of their respective net worth does the present value of the inheritance add for each heir?

Why not just liquidate the inherited assets and distribute cash to each heir?
Your first point is really not relevant in my opinion, we are looking to hold this land for years with an assumption (based on data) that the price will then be higher. With that assumption I am asking what type of entity could help with the sale and distribution of assets. If the price goes down, then it goes down, and it very well could, but that is not what I am asking for guidance on...this land has been in our family for over 100 years. It is also in an area where land has been appreciating very quickly over the past ten years due to a major city expanding in it's direction. Recent tax roles for surrounding areas (in fact, across the street) have in the past two years doubled the value and the same has been seen for actual sell prices of the land in the area. The city has made large purchases of land for city development as well as corporations to build office space very close to our land.

The present value of the inheritance is more than double the net worth for any of the three heirs.

As stated, this land has been owned by my family for over 100 years in an area our family settled in the mid/late 1800s. Not looking to sell it immediately.
scifilover wrote:
Tue Jan 23, 2018 9:22 am
What kind of trust is it? Are you weighing these decisions because of the death of the Trustor? If the Trustor died and the trust assets are to be distributed to the beneficiaries, what does the trust say about how the distribution is to take place?

Regarding the land.....is it currently being rented or farmed? Is there a contract between the trust and the farmer/tenant?

Need to sit down with trustee and get his/her input on your options....
It was an irrevocable living trust and yes, the last surviving Trustor unfortunately has passed away. The trust only outlines the percentage that the three heirs receive, no guidelines for how it must be distributed specifically other than percentage.

There is a home on the land that is being rented (rental income basically covers our expenses) and the land is being farmed. Yes there is.

The current Trustee (one of the three heirs) and I are working together closely on how to best handle these assets, that is why I am asking these questions to help get some guidance.

Thank you all for the replys, any information regarding the investment account aspect?
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not4me
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by not4me » Tue Jan 23, 2018 11:50 am

ef11 wrote:
Tue Jan 23, 2018 11:01 am

Thank you all for the replys, any information regarding the investment account aspect?
I think I'm getting a little lost in exactly what you are trying to do. I understood the property sale would be the main taxable event & you anticipate that being 5 to 30 years out. Yet, you are thinking of keeping that in a corporation-type entity that would get a 22% tax rate upon selling....even though a personal long term capital gain tax rate would be less? Is that for liability protection? Or am I missing something else? I also am not clear on how you'd move the assets from the trust to a corporation....would the original trustee be the sole 'decider' in the corporation? Assuming you had 3 accounts, presumably they would generate different tax liabilities each year for the corporation....that would seem to be hard to fairly manage between the 3....That to say, what is the objective in moving the investment account from the trust & into a corporation instead of the 3 heirs? By the way, the new tax bill changed how farm operations are handled between corporate structures. I don't know it is a given that over a 30 year time frame it will be best to go with the corporate structure just because it doesn't pass thru income

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BL
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by BL » Tue Jan 23, 2018 4:20 pm

How will the decision be made to sell? If 2 want to sell?
If 1 wishes/needs to sell,will others buy him out?
What happens to ownership if one of you dies? Spouse? X number of children?
Who takes over if trustee dies?

What seems simple now may not necessarily be simple later.

ef11
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by ef11 » Tue Jan 23, 2018 4:31 pm

not4me wrote:
Tue Jan 23, 2018 11:50 am
ef11 wrote:
Tue Jan 23, 2018 11:01 am

Thank you all for the replys, any information regarding the investment account aspect?
I think I'm getting a little lost in exactly what you are trying to do. I understood the property sale would be the main taxable event & you anticipate that being 5 to 30 years out. CorrectYet, you are thinking of keeping that in a corporation-type entity that would get a 22% tax rate upon selling....even though a personal long term capital gain tax rate would be less? If this land was sold in 5-30 years, would we only pay long term capital gains taxes and not ordinary income rates? Is that for liability protection? No Or am I missing something else? Nope, I think you are onto something. I also am not clear on how you'd move the assets from the trust to a corporation....would the original trustee be the sole 'decider' in the corporation? Assuming you had 3 accounts, presumably they would generate different tax liabilities each year for the corporation....that would seem to be hard to fairly manage between the 3....That to say, what is the objective in moving the investment account from the trust & into a corporation instead of the 3 heirs? The objective would be to pay 22% tax rates on any taxable gains in the investment account vs. our higher ordinary income tax rates. The main objective however is to protect the taxation of the land sale, investment account is secondary as more than likely too complicated to justify doing it as you alluded to. By the way, the new tax bill changed how farm operations are handled between corporate structures. I don't know it is a given that over a 30 year time frame it will be best to go with the corporate structure just because it doesn't pass thru income
My comments above in red, thank you for the questions maybe I am misunderstanding certain tax policies.
BL wrote:
Tue Jan 23, 2018 4:20 pm
How will the decision be made to sell? If 2 want to sell?
If 1 wishes/needs to sell,will others buy him out?
What happens to ownership if one of you dies? Spouse? X number of children?
Who takes over if trustee dies?

What seems simple now may not necessarily be simple later.
I see so many people on this forum do this, read threads just to play devils advocates about pieces of information that were never asked to be analyzed in the first place. Obviously, all of that would have to be structured just as it currently is in the Trust literature. As it reads now all of heir #1 assets split 50/50 to heir #2 and #3. None of that helps to determine what type of entity should be created, unless you are arguing for the liquidation of all assets and distribution of cash to the heirs immediately in order to make things easier. Given the historic nature of this land in our family, we aren't really looking to sell at this time.
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denovo
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by denovo » Tue Jan 23, 2018 4:43 pm

ef11 wrote:
Tue Jan 23, 2018 11:01 am
J295 wrote:
Mon Jan 22, 2018 11:21 pm
Factual question… If this is an inheritance, why wouldn’t there be a step up in basis on the inherited assets, including the land?
There is a step up basis yes. We are not looking to sell this property now and are trying to understand how to best prepare for a potential sell over the next 5-30 years.

My advice is simple. Value everything and divide out into the respective percentages owned under the trust. Co-owning things with others will eventually lead to acrimonious disagreements.
"Don't trust everything you read on the Internet"- Abraham Lincoln

denovo
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by denovo » Tue Jan 23, 2018 4:47 pm

ef11 wrote:
Tue Jan 23, 2018 4:31 pm
As it reads now all of heir #1 assets split 50/50 to heir #2 and #3. None of that helps to determine what type of entity should be created, unless you are arguing for the liquidation of all assets and distribution of cash to the heirs immediately in order to make things easier. Given the historic nature of this land in our family, we aren't really looking to sell at this time.

You don't need to sell. Distributing to the individual heirs and they can hold on to it is a possibility. You can also partition the land to make the numbers work.
"Don't trust everything you read on the Internet"- Abraham Lincoln

not4me
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by not4me » Tue Jan 23, 2018 4:52 pm

ef11 wrote:
Tue Jan 23, 2018 4:31 pm
not4me wrote:
Tue Jan 23, 2018 11:50 am

I think I'm getting a little lost in exactly what you are trying to do. I understood the property sale would be the main taxable event & you anticipate that being 5 to 30 years out. CorrectYet, you are thinking of keeping that in a corporation-type entity that would get a 22% tax rate upon selling....even though a personal long term capital gain tax rate would be less? If this land was sold in 5-30 years, would we only pay long term capital gains taxes and not ordinary income rates? Is that for liability protection? No Or am I missing something else? Nope, I think you are onto something. I also am not clear on how you'd move the assets from the trust to a corporation....would the original trustee be the sole 'decider' in the corporation? Assuming you had 3 accounts, presumably they would generate different tax liabilities each year for the corporation....that would seem to be hard to fairly manage between the 3....That to say, what is the objective in moving the investment account from the trust & into a corporation instead of the 3 heirs? The objective would be to pay 22% tax rates on any taxable gains in the investment account vs. our higher ordinary income tax rates. The main objective however is to protect the taxation of the land sale, investment account is secondary as more than likely too complicated to justify doing it as you alluded to. By the way, the new tax bill changed how farm operations are handled between corporate structures. I don't know it is a given that over a 30 year time frame it will be best to go with the corporate structure just because it doesn't pass thru income
My comments above in red, thank you for the questions maybe I am misunderstanding certain tax policies.

In case it hasn't already become clear, I'm neither a cpa nor an attorney; also, not familiar with wrinkles that either a trust or being in Texas would bring on.

That said, I'm pretty confident that if the 3 of you inherited the land (that is, outside a trust) it would immediately be considered long term capital by virtue of being inherited. Any income generated would be taxed in that year (not at time of sale). When you sold - 6 months or 16 years -- you would owe long term capital gains tax only on the sale (might still have income generated in year of sale). You referenced the annual income/expense being negligible, but I mention for clarity. I've never tried to move an asset from a trust into a "corporation" (S Corp, etc) per se & so can't speak to whatever taxable event that might bring on. There are reasons why some people keep assets in trust -- debtor protection, future probate, etc -- but I don't think cap gain taxes is one of them.

NotWhoYouThink
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by NotWhoYouThink » Tue Jan 23, 2018 7:36 pm

ef11 wrote:
Tue Jan 23, 2018 11:01 am


It was an irrevocable living trust and yes, the last surviving Trustor unfortunately has passed away. The trust only outlines the percentage that the three heirs receive, no guidelines for how it must be distributed specifically other than percentage.

There is a home on the land that is being rented (rental income basically covers our expenses) and the land is being farmed. Yes there is.

The current Trustee (one of the three heirs) and I are working together closely on how to best handle these assets, that is why I am asking these questions to help get some guidance.

Thank you all for the replys, any information regarding the investment account aspect?
This may be the key, what the specific language is on the distribution. Many people like to keep the money in trust so that it is protected from creditors and ex-spouses, but if the trust specifies that the beneficiaries are to receive the money, then maybe the trust isn't meant to continue, and the beneficiaries are meant to get access to the funds outright. That is something to take up with the attorney you talk to. It seems problematic to keep the money in one trust for all three beneficiaries, with one of the beneficiaries also being a trustee (rather than splitting into 3 trusts, with each beneficiary controlling his own trust). Obviously also problematic to split up the land without selling it.

Good luck.

ef11
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by ef11 » Wed Jan 24, 2018 10:44 am

denovo wrote:
Tue Jan 23, 2018 4:43 pm
ef11 wrote:
Tue Jan 23, 2018 11:01 am
J295 wrote:
Mon Jan 22, 2018 11:21 pm
Factual question… If this is an inheritance, why wouldn’t there be a step up in basis on the inherited assets, including the land?
There is a step up basis yes. We are not looking to sell this property now and are trying to understand how to best prepare for a potential sell over the next 5-30 years.

My advice is simple. Value everything and divide out into the respective percentages owned under the trust. Co-owning things with others will eventually lead to acrimonious disagreements.
I'm not exactly sure what you mean. How would we value everything and divide it out without selling it? If the value was $2,000,000 today it would be $1M to heir #1 and $500K to heirs #2 and #3. I don't see a cut and dry method of doing that without selling the land.
denovo wrote:
Tue Jan 23, 2018 4:47 pm
ef11 wrote:
Tue Jan 23, 2018 4:31 pm
As it reads now all of heir #1 assets split 50/50 to heir #2 and #3. None of that helps to determine what type of entity should be created, unless you are arguing for the liquidation of all assets and distribution of cash to the heirs immediately in order to make things easier. Given the historic nature of this land in our family, we aren't really looking to sell at this time.
You don't need to sell. Distributing to the individual heirs and they can hold on to it is a possibility. You can also partition the land to make the numbers work.
How would we distribute to the heirs without selling? It is 120 acres total and has various features of the land where it would be very hard to split it evenly from a value perspective (road access on part, river on part, etc)

Our main concern was how do we pay the least tax possible upon an eventual sell. Now I see that we will actually pay long term capital gains taxes on the earnings vs. ordinary income tax so that means either 15-20% which beats a corporation's rate anyway. Seems we can leave the land in the trust until we want to sell and then each pay long term capital gains taxes which is ideal.
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scifilover
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by scifilover » Thu Jan 25, 2018 8:43 am

ef11 wrote:
Tue Jan 23, 2018 11:01 am
J295 wrote:
Mon Jan 22, 2018 11:21 pm
Factual question… If this is an inheritance, why wouldn’t there be a step up in basis on the inherited assets, including the land?
There is a step up basis yes. We are not looking to sell this property now and are trying to understand how to best prepare for a potential sell over the next 5-30 years.
123 wrote:
Mon Jan 22, 2018 11:40 pm
What plans do the 3 of you have if the value of the land significantly declines? Would a sale occur if it goes down by 25%, 50%?

How much of their respective net worth does the present value of the inheritance add for each heir?

Why not just liquidate the inherited assets and distribute cash to each heir?
Your first point is really not relevant in my opinion, we are looking to hold this land for years with an assumption (based on data) that the price will then be higher. With that assumption I am asking what type of entity could help with the sale and distribution of assets. If the price goes down, then it goes down, and it very well could, but that is not what I am asking for guidance on...this land has been in our family for over 100 years. It is also in an area where land has been appreciating very quickly over the past ten years due to a major city expanding in it's direction. Recent tax roles for surrounding areas (in fact, across the street) have in the past two years doubled the value and the same has been seen for actual sell prices of the land in the area. The city has made large purchases of land for city development as well as corporations to build office space very close to our land.

The present value of the inheritance is more than double the net worth for any of the three heirs.

As stated, this land has been owned by my family for over 100 years in an area our family settled in the mid/late 1800s. Not looking to sell it immediately.
scifilover wrote:
Tue Jan 23, 2018 9:22 am
What kind of trust is it? Are you weighing these decisions because of the death of the Trustor? If the Trustor died and the trust assets are to be distributed to the beneficiaries, what does the trust say about how the distribution is to take place?

Regarding the land.....is it currently being rented or farmed? Is there a contract between the trust and the farmer/tenant?

Need to sit down with trustee and get his/her input on your options....
It was an irrevocable living trust and yes, the last surviving Trustor unfortunately has passed away. The trust only outlines the percentage that the three heirs receive, no guidelines for how it must be distributed specifically other than percentage.

There is a home on the land that is being rented (rental income basically covers our expenses) and the land is being farmed. Yes there is.

The current Trustee (one of the three heirs) and I are working together closely on how to best handle these assets, that is why I am asking these questions to help get some guidance.

Thank you all for the replys, any information regarding the investment account aspect?
I can tell you what I did as trustee to distribute assets from such a trust. For the investment account which was at Schwab, each beneficiary was directed to open an account at Schwab and to provide me with their account numbers. I then created a spreadsheet that listed the assets and divided them into portions per the trust instructions. As nearly as possible each holding was divided into those portions and in the end balanced with cash from the trust. I then provided a copy to Schwab who used it as instruction to make the transfer. I also provided this to the beneficiaries.

For the real property, the atty I used for the trust simply re-titled it in the names and showing the percentages as provided for in the trust and filed that with the county along with portions of the trust paperwork. In your situation, if you and the other beneficiaries get along well, you could start an LLC and contribute your share of the real property into the LLC. Then the LLC can keep the property insured deal with the tenant, and the farmer. As you collectively decide, you can sell it or retain it.

sco
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Re: Inheritance: Trust with Land + Investments - 3 Heirs

Post by sco » Thu Jan 25, 2018 8:07 pm

I don’t understand why you would do anything other than distribute to all 3 today evenly and be done with it. Perhaps an agreement that if any of the people decide to sell the land that the other 2 have first dibs to buy it?

When is the corporate tax rate going to be less that long term (you said 5-30 year) capital gain? Once it is distributed to the 3 people, they will have more options, at least with the $$$...

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