READY TO SELL YOUR FARMLAND TO A DEVELOPER

PLAN AHEAD AND SAVE A BUSHEL OF TAXES!

The Smiths have 150 acres that they paid $25,000 for 40 years ago. Today, housing developments have sprung up all around the farm, and the fair market value of the land has appreciated to $4,000,000. The Smiths are retired and receive about $2O,OOO per year from leasing the land to farmer. The Smiths have 4 children who will be their beneficiaries, and the farm accounts for most of the value of the estate. The Smiths would like generate more income for their retirement years, and therefore would like to sell the farm. They would also like to reduce or eliminate as many taxes as possible during their lifetime and after their deaths.

If the Smiths were to sell the farm for $4,000,000 today, they would have to pay nearly $1,000,000 in capital gains tax. Then they could invest the remainder and live off the income. Upon the death of the surviving spouse, the balance left from the sale of the farm could be subject to an additional 55% federal estate tax when the child receive their inheritance. Therefore, by an outright sale and reinvestment, with all the income being spent by the Smiths during their lifetime, the estate will lose about $2,000,000 of the total $4,000,000 by the time it reaches the second generation. The solution to the problem is the Charitable Remainder Trust (CRT).

The CRT is an irrevocable trust. The trustmakers set up the trust and transfer an asset into the trust. The trustee of the trust sells the asset and invest the proceeds. The trustee pays the clients a guaranteed income for the rest of both the husband's and the wife's lives. After both spouses are deceased, the remainder of the trust is passed to a charity that the trustmakers chose when they established the trust.

The tax rules pertaining to a CRT include the following

• Any asset sold by a CRT pays NO CAPITAL GAINS TAX, regardless of the appreciation;
• Any asset contributed to a CRT today is removed from the trustmakers' estate, and is therefore free from any federal estate taxes upon their deaths;
• The trustmakers/donors receive a charitable deduction from income taxes, based on life expectancies and what the charitable remainderman is expected to receive someday;
• If the trustmakers/donors do not need the entire tax deduction this year, it may be carried forward for up to five more years;
• The donors choose the charity or charities that will ultimately benefit from the trust, and reserve the right to change those charities throughout the donors' lifetime. The charitable remainderman could be their own family foundation;
• The donors also choose the rate of return they would like the CRT to pay them (the minimum is 5%). That rate will be paid to both of the trustmakers until the second spouse has passed away. That annual income is typically counted as normal income for income tax purposes. CRTs can also be structured to pay out for the lives of other people besides the spouses, or for a term of years; and
• Any asset that is donated to a CRT will end up being passed to the charities rather than to the children (beneficiaries). If this result is not desired, then the asset can be replaced with a life insurance policy paid for with some of the increase in annual income generated by the trust. If the insurance is owned by another type of trust (the Irrevocable Life Insurance Trust), this insurance will pass to the children free of both income and estate taxes

The benefits for our hypothetical Smith family include the following:

1. The Smiths avoid over $1,000,000 in capital gains taxes, leaving them much more to invest after the sale;

2. The farm is now out of their estate, thereby saving over $1,500,000 additionally in federal estate taxes;

3. If they choose a 6% annual return, they will get $240,000 per year for the rest of both of their lives, as compared to the current $20,000 per year they get from rent;

4. They will get a charitable tax deduction of approximately $2,000,000 which amounts to almost $800,000 in actual tax savings at the 39.6% tax bracket. This can be taken over an additional five years if they don't need that much this year;

5. They will use part of the increased annual income to invest in a cash value life insurance policy that pays at the second death. The death benefit goes to the children and replaces the value of the farm that went to the charity;

6. The end result is that THE CLIENT WINS, THE CHILDREN WIN and the CHARITY WINS. The only one left out is the IRS.

The law allows this because our society has determined that it is a good thing to benefit charities. This planning method is widely used not only by clients with highly appreciated farms and other real estate, but also with any other highly appreciated asset such as a publicly traded stock, a family business, or an over-funded retirement plan.