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Good day All. Today we will look at Trusts, as an effective tool for managing agricultural assets. It is a fact that the key to investment success, is the effective management of an investment portfolio. For families, one of the key requirements is a multi-generational portfolio, this is a portfolio that is effectively passed from generation to generation.
Asset management is so critical and in every type of investment venture, the management system, philosophy and structure is even far more important than the ability to buy or sell individual securities. This is especially true, as algorithms have completely cornered the short term trading opportunities in the financial markets. Therefore, success lies in the ability of an investor to be broader and more strategic in their thinking.
I have said many times before, but it is worth repeating that it is critical to have an investment plan that includes goals, time frames, risk management, portfolio management systems and if an investor cannot do this themselves then it is important to seek professional advice, because one’s financial future must be correctly planned.
Having said that, I must also add that I do not believe in passive investment management strategies, because the phrase ‘passive investment management’ is an oxymoron, because the word ‘management’ and its synonym ‘stewardship’, are words that denotes control, responsibility and positive action to add value through hard work, knowledge, wisdom and experience, so that in the end, the value of what was given has dramatically increased.
The idea of added value - by being passive and simply following the market, then expecting to be handsomely rewarded for that. It is absurd to say the least and the fact, that this has become so acceptable is tragic. The investment management industry has lost its will to fight and to do right for its clients, but it is simply content for taking fees while doing the basic minimum.
There is something so liberating about hard work and having an ethic of excellence which has been lost in our society today, there is comfort in knowing that if I work hard and consistently improve my craft, I will be rewarded, this is my insurance policy. It works because most people only ever reach 40% of what they are capable of without giving up and by doing that little extra, one can become in the top 10% of any field, therefore I find passive investing to be an extremely intellectually lazy concept that does not accurately reflect the true essence of our industry to the general investing public.
What is a Trust?
A trust is a legal device that allows several entities to have ownership rights over the same property. A trust has three main parties: the settlor, the trustee and the beneficiary.
The settlor of the trust is the initial owner of the asset, he/she/they create a trust and selects a trustee to manage the trust, which includes the asset or assets known as the trust property.
The agreement between the settlor and the trustee is called the trust deed and it encapsulates the duties of the trustee to manage the assets in a certain way and according to various legal principles for the benefit of the beneficiary who is now the ultimate owner.
From a property and trust law perspective, at this point, the settlor does not have any more rights to the asset but the legal owner is now the trustee. This can be a bank, a law firm, responsible relatives etc.
The trustees will look to the trust deed, which tells them how to manage the assets and what to give to the beneficiaries and when to give it. In many cases, the settlor adds himself/herself as a beneficiary.
This works very effectively in a family setting, where a settlor is looking to put his estate in order. At this point, as soon as he puts it in a trust, the tax status for him, the trust property and the beneficiaries all change.
There are very different rules across common law jurisdictions and also civil law jurisdictions that have transposed trust law principles into their legal systems, but there are various principles and purposes, which are generally applicable to the creation and use of trusts:
1. The trust enables the separation of ownership and control with the trustee having control, while the beneficiaries have ownership based on the specific provision of the trust deed.
2. The trust is a separate taxpayer for tax reasons and it must file its tax returns yearly.
3. The disposition of the trust property from the settlor to the trust, is deemed to be a sale at fair market value, and a valuation must be done from the time the asset was acquired to the day it was transferred to the trust, and the settlor must pay capital gains tax and depending on the personal circumstances of the settlor, he/she/they could have various capital gains exemptions.
4. There are various tax mitigation rules and exemptions that vary in different legal jurisdictions and based on different types of trusts.
5. The main use of trusts, is tax planning. In jurisdictions, where one has graduated tax rates, whereby as one’s income rises, their tax rises. Trusts are useful, because the income can be split across the family including the farmer, his spouse and their children - as beneficiaries, and they can all be taxed at lower rates.
6. Inheritance Mitigation - upon the death of the settlor, the assets will not need to be reported and assessed for inheritance tax.
7. Creditor Protection. The property does not belong to the settlor, the trustee or the beneficiaries so the assets are protected from creditors.
8. Confidentiality is a benefit, as the trustee conducts business in the name of the trustee or the trust and the beneficiaries do not need to be disclosed.
9. Trusts help to protect against matrimonial claims, as they are ineligible to be considered as matrimonial property, as the beneficiary does not have any interest in the land, so farmland can be protected in case of matrimonial breakdown.
10. Discretion on vesting rights - the trustee is normally required to use discretion in cases where one child wants to keep farming, but the others do not, then the trustee decides which child gets which asset.
11. Protection of Beneficiaries. For example, where the trust vest when the beneficiary is over twenty one years.
12. Spousal Trusts. In instances, where the surviving spouse may not be able to manage the property correctly, so the farm is put into a trust, this can also be in cases where the spouse is a spendthrift or has medical conditions that has left them incapacitated.
13. Farm Purification is another useful use of trust, when excess cash is used to purchase non farming assets, which can disqualify it from various farming tax benefits. In such cases, the non-farming assets can be transferred to the beneficiaries directly or a sister company controlled by the beneficiaries.
Certainly trusts are as easy or complicated as the assets, family structure and advisors, who are structuring them, but they remain a very useful asset management vehicle.