Inwood National Bank v. Fagin and Its Implications for Farmers and Small Business Owners

As individuals  plan for their legacy, the intersection of estate planning, business ownership, and elder law becomes increasingly critical, especially for farmers and small business owners who often rely on closely held business interests to sustain their families. A recent Texas Supreme Court decision, Inwood National Bank v. Fagin, No. 24-0055 (January 31, 2025), offers valuable insights into the complexities of transferring such interests into trusts, particularly when contractual restrictions and personal reconsiderations come into play. This case, while rooted in Texas law, has broad implications for Ohio and Missouri residents and others navigating similar challenges, especially those in agriculture or small enterprises.

Case OverviewThe Inwood National Bank v. Fagin case centered on Christy Fagin, who sought to transfer shares of Inwood Bancshares, Inc. (an S corporation) into a Qualified Subchapter S Trust (QSST) for her husband, Kyle, as part of estate planning. The shares were governed by a shareholder agreement requiring Inwood’s approval for transfers. The trust document listed the shares on Schedule A with the notation that Christy “intends” to transfer them upon Inwood’s approval. After initiating the process—prompted by the need to replace a lost share certificate—Christy reconsidered, realizing the transfer would make the shares Kyle’s separate property, irrevocable due to the QSST election. She withdrew her intent, never surrendering her replacement certificate, and Inwood did not countersign the necessary subscription agreement. Kyle sued Inwood for tortious interference, claiming the QSST owned the shares, but the Texas Supreme Court reversed the appeals court, ruling that the transfer was never complete due to the unfulfilled condition of Inwood’s approval.Legal AnalysisThe Court held that the transfer was subject to a condition precedent (Inwood’s approval), which was not satisfied despite the trust’s irrevocability. The conditional language on Schedule A distinguished this from an immediate gift, and the lack of bilateral performance (e.g., certificate surrender, countersignature) underscored that no enforceable contract existed. This decision aligns with prior cases like Smaldino v. Commissioner, which addressed transfer tax implications, but Inwood emphasizes the primacy of contractual conditions over trust intent when external approvals are required.Implications for Farmers and Small Business OwnersFor farmers and small business owners, this case highlights several key considerations:

• Transfer Restrictions in Business Agreements:  Many family farms and small businesses operate under shareholder agreements, LLC operating agreements, or buy-sell agreements that restrict equity transfers, often requiring management or co-owner approval. For instance, a farmer transferring farmland or equipment interests into an irrevocable trust to protect assets for Medicaid eligibility must navigate these restrictions. Evem a conveyance of business interests to a revocable trust must orient transfer considering these restrictions. Inwood clarifies that failure to secure approval renders the transfer incomplete, potentially leaving assets exposed to creditors or unintended heirs.

• Irrevocable Trust Challenges: Irrevocable trusts are popular for elder law planning to shield assets from nursing home costs, but Inwood underscores the risk if the grantor reconsiders mid-process. A farmer funding a trust with a 50% stake in a family LLC might change their mind upon realizing it reduces their control or income, as Christy did. The case suggests that until all conditions (e.g., co-owner consent) are met, the grantor can retract, but this delay could jeopardize Medicaid planning if within the 5-year look-back period (42 U.S.C. § 1396p).

• Revocable Trust Challenges:  Revocable trusts are often utilized by farmers and small business owners to orient their estate administration privately, outside of probate.  Trusts typically make challenge and contests more difficult by, among other things, including a "No-Contest" clause.  Failure, however, to properly assign, transfer, or convey business interests might open the trust estate estate to challenge or contest particulalrly, as is often the case, farming heirs are treated differently than non-farming heirs.  Non-farming heirs would not have to contest the trust, but the failure to properly convey business interests to the trust.

• Estate Planning Precision:  The decision emphasizes the need for precise drafting. Listing assets on a trust schedule with conditional language (e.g., “subject to approval”) protects against premature transfer claims, but farmers must ensure all parties, trustees, co-owners, and legal counsel, align on procedures. A small business owner transferring a machinery business interest might face disputes if the trust assumes ownership without formal transfer, as seen in Kyle’s failed claim.

• Marital and Succession Planning:  The Fagin’s marital discord post-transfer attempt mirrors issues common in family-run operations. A farmer transferring assets to a spouse’s trust might reconsider if it alters property division in a potential divorce. Inwood supports the grantor’s right to withdraw before completion, offering flexibility but requiring clear documentation to avoid litigation, as Kyle pursued.

• Elder Law and Medicaid Considerations:  
  For aging farmers or business owners seeking Medicaid, a disclaimer to redirect assets (e.g., to a child’s trust) could be affected by transfer restrictions. If approval is pending and the grantor retracts, as in Inwood, it may not trigger a penalty, but any subsequent transfer attempt within the look-back period could be scrutinized. Consulting an elder law attorney is crucial to document intent and timing.

Key Takeaways

• Contractual Compliance: Farmers and small business owners must strictly adhere to business agreement terms (e.g., approval processes) when funding trusts. Oral agreements or partial steps, as in Inwood, won’t suffice.
• Drafting Clarity: Trust schedules should explicitly note conditional transfers, avoiding assumptions of immediate ownership. This protects against disputes and ensures alignment with business governance.
• Flexibility and Risk: The ability to retract a transfer offers flexibility but risks delaying asset protection strategies, especially for Medicaid planning. Early coordination with co-owners and counsel is essential.
• Legal Guidance: Given the case’s emphasis on procedural rigor, engaging experienced estate and elder law attorneys is vital to navigate restrictions and protect generational wealth.

ConclusionInwood National Bank v. Fagin serves as a cautionary tale and a planning tool for farmers and small business owners. It reinforces that contractual conditions trump trust intent until fully executed, offering a safety net to reconsider but demanding meticulous execution. For Ohio and Missouri rresidents, where family farms and small businesses are cornerstones of rural economies, this ruling underscores the need for tailored estate plans that balance control, protection, and succession. Consult an attorney to align your trust funding with business agreements and elder law goals, ensuring your legacy thrives for future generations.

Medicaid Applicant Receives Penalty Period Based on Wife's Transfer on Death

A Missouri court of appeals has ruled that a Medicaid applicant is subject to a penalty period based on his wife's transfer on death of his interest in property to a revocable trust. Hallam v. Missouri Department of Social Services (Mo. Ct. App., No. WD81466, Oct. 9, 2018).  The case demonstrates the complexity of estate planning for farmers, and provides an object lesson in the significance of unintended consequences.

Evelyn and Joe Bell were farmers, and their homestead constituted their farm. They  entered into a postnuptial agreement which provided that each spouse had "the power to dispose of their share of the marital assets at their death free of any statutory or other claims of their spouse."  The Bells thereafter each created a limited liability company (LLC),  in which each served as the sole member. On the same date, the couple transferred into each LLC a one-half interest in the real estate and adjoining farmland that had served as their homestead. 

The Operating Agreement for Mrs. Bell's LLC provided that on her death, her member interest in her LLC would be transferred to the trustee of Mrs. Bell's revocable trust. Mr. Bell was neither the trustee of Mrs. Bell's trust, nor was he a beneficiary.  The foregoing events all took place in 2011.  In 2013, Mr. Bell transferred his LLC to Mrs. Bell, who in turn who transferred the LLC to the trust effective upon Mrs. Bell's death.  The Court agreed that the transfer from Mr. Bell to Mrs. Bell is permitted by state and federal law:

"Relevant to this case, [federal law] provides that: An individual shall not be ineligible for medical assistance...to the extent that -- (A) the assets transferred were a home and title to the home was transferred to -- (i) the spouse of such individual[.]"

Mrs. Bell died in January, 2014, her trust was administered and the assets distributed to the beneficiaries, Mrs. Bell's children.  In December, 2014, Mr. Bell entered a nursing home and applied for Medicaid. The state imposed a penalty period, finding Mr. Bell transferred property for less than market value.

Mr. Bell appealed, arguing that Mrs. Bell's transfer on death of the couple's property was not a voluntary disposal of assets by a spouse that would disqualify Mr. Bell from benefits. After all, Mr. Bell could not control his wife's disposition of her property, and Mrs. Bell did not voluntarily transfer the assets to her children, but were transferred as a consequence of her death. The state upheld the penalty period, nonetheless, and Mr. Bell appealed to court.

The Missouri Court of Appeals affirmed the penalty period, holding that Mrs. Bell's transfer on death was a disposition of assets that subjected Mr. Bell to a penalty period. The court concludes that there "can be no meaningful dispute that the instruments executed by Mrs. Bell 'gave away' her assets, albeit in a delayed manner that first required the condition of her death." According to the court, federal Medicaid law requires that the assets in Mrs. Bell's trust that previously belonged to Mr. Bell were to be treated as assets disposed of by Mr. Bell.  Thus, although Mr. Bell was not in control of his wife's disposition, he and his estate, nonetheless, suffered the consequences.