Aside from its people and its strong sense of community, one of the most precious things about the Skagit Valley is its land. Most of us either own some or aspire to own some. And those who do own some—whether it’s the family home, the family farm, or both—usually have a clear idea about where they want it to go and how they want it used in the future.
It’s these ideas that often bring people to talk with someone like me: an estate planning and land use attorney. Unfortunately, most people (and we’re talking pure statistics here) never get past the planning stage. They never identify the “tools” they need to bring their vision to life. And of course, if you don’t identify the tools, you can’t put them into action.
Sometimes, the end result is acceptable. Under Washington Law, your land may still go exactly where you want it to go. But not always. And once it’s gone, it can be costly if not impossible to get back. Picture this not-so-uncommon scenario:
A husband and wife prepare their Wills when their children are young. They specify who will be guardian of their children if they die prematurely, and that all their assets—including their new home—be divided between their children, held in trust until they turn 25. Pretty standard stuff.
Two decades go by, the children are now twenty and twenty-two. The family home has evolved into a cluster of rental and commercial properties, which the children are starting to manage.
The father dies unexpectedly at the age of 45. A heart defect that went unnoticed. He has no life insurance, and just a small retirement account. The investment properties are their livelihood.
Another fifteen years go by, the mother remarries. She and her new husband prepare a status-quo estate plan. Everything to each other, then to their respective kids. The mother steps back from the family business, as she and her late husband had always intended for their children to take it over. Her “children” are now in their thirties and starting their own families. The older one handles the day-to-day operations, while the younger manages the finances.
The income from the investment properties pays them each a salary, but they haven’t been able to save much. The equity will fund their retirement after their mother passes. Until then, properties will be sold as needed to pay for their mother’s long-term care.
Another ten years slips by and the mother is showing early stages of dementia. No one is sure how much longer she can stay at home. The children know they should talk with an attorney, but life happens and it keeps getting bumped to the end of the list. The “new” husband is still around, but is spending more and more time with his own kids and grandkids in Idaho.
At 72, the mother dies in a car accident. Her Will is probated and the properties go to her husband. Her children have lost their retirement funds and their jobs.
There are a number of estate planning “tools” that could have honored the children’s hard work and protected her and her late husband’s vision of leaving a legacy for their children—even without forcing her to choose between her children and her new husband.
First, though, let’s assume the mother wanted these properties to go entirely to her children when she died, without any consideration for her new husband. Let’s also assume she didn’t do anything about this until after she was re-married. At this point, there are two basic tools she could use to achieve her vision. First, a Separate Property Agreement (or Property Status Agreement) could be used to establish that the investment properties are the mother’s separate property—and not the property of the new husband. She can then leave the properties (in their entirety) to her children through the second “tool,” her Will.
Note that without the Separate Property Agreement, the investment properties would be treated as community property in Washington—which basically means the mother and her new husband each own half. The mother could still leave her half of the properties to her children, but they would then co-own the properties with their stepfather. Not always the best (or desired) situation.
Now let’s assume the mother still wants these investment properties to go to her children, but she also wants to provide for her husband while he’s alive. She could use a Will or Revocable Living Trust to transfer some or all of the property into an “irrevocable” trust upon her death. The trust could require that all income be paid to the husband so long as he is living, with or without the right to sell properties or tap into the principle if he needs it. After the husband dies, the trust could dictate that the properties go to the children.
Again, though, the new husband will need to sign a Separate Property Agreement or otherwise release his interest in the property prior to the mother’s death, which means he needs to agree with either of these plans. So best to plan early, while things are going well and everyone is on good terms.
Now let’s consider one option the mother could have taken advantage of with sufficient advance planning. Prior to re-marrying, the mother could have transferred the investment properties into a family limited partnership. The mother can then gift interests in the partnership to her children over time, in a gradual and strategic manner. This type of arrangement can continue to provide for the mother, while giving the children an increasing role and investment in the business. It may also have tax advantages, especially if the investments have substantial value. Bear in mind that this strategy can also be utilized after the mother has re-married, but the “community property” complications discussed above will apply.
There are certainly many other tools not mentioned here, and none of these should be approached without legal or financial guidance. Circumstances always vary, and there is no one-size-fits-all approach to estate planning—especially when property is involved. But hopefully this gives you an idea of the types of questions to be asking, and the importance of seeking guidance so your vision is properly achieved.
In the next two blogs in our Skagit Valley Landowner series, we will discuss:
- the Washington Transfer on Death Deed—and other ways of avoiding probate for landowners, including when probate avoidance may not be desirable;
- and special considerations for land classified as Timber, Agriculture or Open Space—including options for giving all or a portion to charity, either outright or through the use of conservation easements.