Farm Progress

Commentary: Could a charitable remainder unitrust work well for your family farm?

November 7, 2016

5 Min Read

It’s a situation becoming more common these days: multigenerational farmers deciding what to do with land that has been in the family for decades when there is no one in the family to pass it to — or no one who remains interested in continuing the business.

Delores “Dee” Lourash Clark, whose longtime family farm in Macon County had appreciated in value over tenfold, found herself in this situation recently and decided that funding a charitable remainder unitrust (CRUT) with a portion of the farm was a viable solution for her.

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“I don’t believe in giving a lot of money to your kids and grandkids, because it can lead to all kinds of trouble, and taxes sure can take a lot when you sell the land,” says Clark, who also was interested in supporting a favorite charity. “After several meetings with the lawyers, accountants, our farm manager and the foundation people, I decided it made a lot of sense to go with the charitable trust rather than sell the land outright.”

Clark’s CRUT is paying her lifetime income and also her daughter’s lifetime income, with the remainder going to the Christian Church Foundation and the Tennyson Center for Children at Colorado Christian Home. Clark adds, “My daughter will continue to receive income that will help her live comfortably, and she won’t have to deal with the farm.”

How it works

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You work with an estate planning attorney to draft the CRUT, and then transfer ownership of the land and equipment into the trust. Since the trust is a charitable entity itself — and tax-exempt — it can sell the assets without being on the hook for capital gains taxes. A corporate trustee, such as a bank’s trust department, invests the proceeds from the sale to provide income to the beneficiaries for lifetime or a fixed term of years (income beneficiaries can be you and your spouse, and/or your heirs). What is left in the trust account when the trust ends, known as the remainder, goes to your charity or charities of choice.

Here are some tax implications:

• When you give the land and equipment to the CRUT, you may claim an income tax deduction that year based on the present value of the charitable remainder interest, which can be carried forward up to five more years on your Form 1040 to maximize the deduction. Various factors determine the amount of the deduction, and the annual maximum deduction for a gift of appreciated property is limited to 30% of one’s adjusted gross income.

• No capital gains tax is incurred because the trust that sells the assets is tax-exempt — so the funds that would have been used to pay capital gains taxes on a cash sale can now be used to generate retirement income for you and/or your heirs.

• Assets used to fund the CRUT are removed from the donor’s taxable estate, and the CRUT is not subject to probate.

How it plays out

Let’s look at a hypothetical example: an 80-year-old central Illinois couple, having no children or other heirs, decides they would enjoy the extra income to travel and don’t wish to continue owning the 160 acres of prime farmland they have been renting out for years. They purchased the land as an investment many years ago for $1,850 per acre, and a recent appraisal indicates the land is now worth $10,000 per acre. They are longtime supporters of their church, and their advisers suggested they consider contributing all or part of their land to a CRUT to avoid the capital gains, increase their income, enjoy a charitable gift deduction and make a nice gift to their church in the future.

After thorough research and evaluation, the couple decides to deed an undivided 50% interest in the land to a newly formed CRUT. Then both the couple and the trust, as owners, sell the entire parcel of land. The charitable gift deduction generated by the couple’s gift of the undivided 50% interest to the CRUT offsets the majority of the capital gains tax incurred on the portion sold for cash — and the couple begins enjoying income from a two-life charitable remainder unitrust with a 7% annual income payout rate that they elected.

Some important data (calculations will vary based on age of donors, cost basis and other factors):

• Asset value (80 acres at $10,000 per acre): $800,000
• Cost basis (80 acres at$ $1,850 per acre): $148,000
• Capital gains tax savings (calculated using 2016 rates): $155,176
• Charitable gift deduction (calculated using donors’ ages): $373,256
• First-year income (variable thereafter, not less than 5%): $56,000

Because the donors chose a unitrust, rather than an annuity trust, the annual income total may vary each year based on investment performance of the trust principal, but not less than 5%. An annuity trust pays at a fixed rate annually and does not vary. Either option must preserve as a remainder at least 10% of the net fair market value of the assets funding the trust on the date of the gift in order to qualify as a CRUT.

While the charitable remainder unitrust is a time-tested estate planning tool, your estate plan should be personalized to fit your particular needs, so please consult your advisers.

Brandon works in trust and wealth management for Hickory Point Bank and Trust, Decatur. Email him at [email protected].

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