Have planning cake — and eat it, too

Steve Gammill
Steve Gammill

Consider once again as an illustrative example the circumstances of my hypothetical clients. Carole and Bill have just learned Carole’s grandmother passed away and left a small ranch to Carole and her sister, Janet, outright, free and clear.

The ranch is leased to neighboring ranchers as pasture and Janet and Carole will be absentee landlords. They don’t plan to actually operate the ranch, but will continue as landlords, employing a ranch manager to run the place and handle day-to-day concerns.

However, Bill and Carole — and now Janet and her husband Charlie — worry that upon the death of one or both of the sisters, there could be a big mess. Spouses, children, spouses of children and possibly others will become unwitting, and perhaps unwanted, partners. That doesn’t look pretty.

Everyone will have different agendas. Some might want to sell the ranch and convert the proceeds into cash. Others might want to preserve the ranch forever for family recreational use. Still others could want to break off their own parcels and become cowboys on their own.

From a tax perspective, the ranch will add about $2.5 million each to Janet’s and Carole’s estates for transfer tax calculations, and the effect of that depends a lot on the transfer tax exemptions available then.

The primary concern of both families is to solidify their own goals for the family use of the ranch and reduce their taxable estates while not losing the income stream.

Can this be accomplished?

It can with some creative and careful design work.

Carole can create a trust for her own benefit, transferring her undivided half interest in the ranch to the trust while retaining the right to income for life.

This is possible in a state that permits a self-settled trust, one in which the trust creator is also the beneficiary and trustee. In Carole’s home state of Colorado, that’s as yet an unresolved question, although there is an old case that seems to permit it.

It also works in a state that doesn’t permit a self-settled trust if the income distribution to Carole is wholly discretionary with the trustee and that trustee is not Carole. With Carole having no right to demand a distribution of any type, the trust isn’t self- settled.

Of course, if the trustee isn’t required to make a distribution to Carole, Carole faces the risk a trustee will do just that — refuse to make distributions.

There are other strategies and techniques that could be applied depending on what the sisters decide they want to accomplish. The laws of each state could be different in terms of what’s allowed.

No planning attorney will undertake this without some careful research.

Janet will create her own trust that basically does the same thing, but carefully drafted to avoid any reciprocal trust issues. While that’s a subject for another column, it’s worth noting that with wholly discretionary trustees, the reciprocal trust doctrine loses some of its steam.

You can’t have your cake and eat it too, or so they say. But this planning strategy comes tantalizingly close. It’s an advanced planning design and certainly won’t fit everyone’s comfort zone. But Bill and Carole, along with Janet and Charlie, are giving it some serious thought.